Why countries join currency war?

Why countries join currency war?

Currency war is when a nation's central bank uses expansionary monetary policy to decrease the value of its currencies. Low currency makes their goods become chaper than others.  It is a condition where countries compete against one another to achieve a low exchange rate for their own currency.

When the currency decreased, so too does the price of exports. And the imports to the country become more expensive. Devaluation of currency can harm the citizen's living standard as their purchasing power is also reduced and it can discourage foreign investor.  However, when country is suffering from high unemployment this devaluation can be seen as advantegeous. When the imports are getting expensive, it make exports become cheaper. It tends to encourage more domestic production and raise employment. 

Currency war is a way to export deflation. As one country starting to decrease its exchange rate, another country's exchange become stronger. The imports become cheaper for the strengthening currency and export become expensive. Since this force them to reduce their prices in order to maintain their market share, when one country reduce its currency, its majir trading partners also follow to reduce their own currencies.

There are 2 ways that countries enter currency wars (marketrealist.com). The first one is by lowering interest rate. A central bank lowering its interest rate to stimulate domestic demand and consumption. Money is available cheap and this boost inflation. A higher inflation reduces a currency's real value and would lead to depreciation. And second is by quantitative easing measures. QE such as asset purchase or bond-buying programs are used by central bank to increase the supply of money in the market. With this, the central banks aim to promote increased lending and liquidity.

Author : Carnesia Deswara Chandra - 1801400480