Why do Governments Delay Devaluation?: The political economy of exchange rate inertia

Graham Bird & Thomas D. Willett

Published: December 2008

In the sequence of currency crises in emerging economies in the 1990s, there was an observed reluctance to devalue the exchange rate. Although ultimately adopted, the decision to devalue was usually delayed, often until it could no longer be avoided. While economic explanations of delay are available, they need to be combined with an evaluation of the political implications in order to secure a better understanding of exchange rate inertia. This article presents a political economy interpretation of delayed devaluation. It introduces and discusses the determining factors drawing on available empirical evidence and briefly applies these ideas to a range of specific examples. It also examines why there may be even more impediments in the way of timely revaluation. Since delayed exchange rate adjustment carries economic costs, the article also considers ways in which delay may be minimised.