Underestimating the Costs of Overvaluation

Abstract

In addition to the obvious cost of the debt burden on loans used to finance deficits, overvaluation of a national currency weakens the competitiveness of national industries and contributes to the likelihood of more serious, delayed costs of adjustment and intersectoral reallocation of resources. These costs are heavy costs to put against the political expedient of delaying the realignment of an overvalued currency.