Monday, February 19, 2018

Devaluation poses risks for small, open economies*

One of our economists recently suggested that T&T’s foreign exchange control policy should not be one of incremental devaluation; it should now be a substantial devaluation possibly of the order of the overvaluation of the TT$ as stated by the IMF. However, another economist recommends a dribbling devaluation that parallels the mismatch between say our inflation rate and that of the US—this would easily be tolerated, not even noticed, by the population. Yet another economist recommends a fixed exchange rate and fiscal methods used to control aggregate demand for imports.
What is interesting is that Jamaica has been the victim of this dribbling devaluation since the 1970’s when its dollar was a bit stronger than the US$ and now it is J$125 to the US$1. Still, today the IMF is claiming that the J$ is overvalued! Our economists present us with many reasons why our dollar should be devalued.

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