Initially, the term devaluation appeared to describe the process in the conditions of the gold standard, when the gold content of a monetary unit decreases. In modern conditions, devaluation is used to describe a situation when the exchange rate of the national currency significantly depreciates against hard currencies, which usually include the US dollar and the euro.
Devaluation is understood as a decrease in the purchasing power of the national currency. But unlike inflation, when a currency depreciates in the local market, devaluation is a broader concept that affects relations with other foreign currencies. Devaluation processes cannot be included in the framework of one territory, since they describe the ratio of the exchange rates of different currencies.
Devaluation can occur in the event of high inflation and a deterioration in the country's trade balance, when imports exceed exports.
After the abolition of the gold monetary equivalent, the national banks of the country began to use devaluation as a tool for managing the national currency. It is caused not only due to macroeconomic factors, but also due to the decision of the regulatory authorities. This is how the official depreciation is carried out, the refusal to peg the rate of the national currency from the currencies of other countries, the refusal to support the currency, and so on. After devaluation, it is possible to achieve an increase in the cost of imports and a reduction in the cost of exports, which in turn solves such problems as improving the balance of payments, increasing the competitiveness of goods in the international market, and stimulating domestic production.
Distinguish between open and hidden devaluation. In the event of an open devaluation, the country's Central Bank issues an official announcement on the devaluation of the national currency. The depreciated paper money is withdrawn from circulation or exchanged for new credit money, while the exchange rate is quite low and corresponds to the depreciation of the old money. Latent devaluation occurs with a decrease in the real value of a monetary unit in relation to foreign currencies, but not with the withdrawal of depreciated money from circulation. Open devaluation leads to a decrease in commodity prices, while latent devaluation causes price changes.