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over-valued currency


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A currency whose exchange rate is too high for a sustainable equilibrium in the balance of payments. With no capital movements a currency is overvalued if its exchange rate is too high to produce a balanced current account. With autonomous capital movements a currency is overvalued if its exchange rate is too high to produce a current account deficit that can be financed by a sustainable flow of inward capital movements. A currency can be held for some time at an overvalued rate by using high interest rates to induce inward short-term capital flows, but this causes external debt to rise at a rate which is not permanently sustainable. High interest rates needed to prop up an overvalued currency are also unlikely to be consistent with internal balance in the economy.

Subjects: Economics.


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