How does a devaluation differ from a depreciation?

A devaluation is a deliberate downward adjustment to a country's currency value, while depreciation is a market-driven decrease in value.

Devaluation and depreciation both refer to the decrease in value of a country's currency relative to other currencies. However, the key difference lies in how this decrease is brought about. Devaluation is a policy decision made by the government or central bank of a country to intentionally lower the value of its currency. This is often done in fixed exchange rate regimes where the government or central bank maintains control over the value of the currency. Devaluation is typically used as a tool to correct trade imbalances, as it makes exports cheaper and imports more expensive, thereby encouraging domestic consumption and production.

On the other hand, depreciation is a market-driven phenomenon that occurs in floating exchange rate systems. It is the result of changes in market dynamics such as supply and demand, inflation rates, interest rates, and economic and political stability. When a currency depreciates, it loses value in comparison to other currencies. This can happen due to a variety of factors, such as a country's economic performance, political instability, or changes in global market conditions.

For example, if investors lose confidence in a country's economy, they may sell off their holdings in that country's currency, leading to an increase in supply and a decrease in demand for the currency. This would result in a depreciation of the currency's value. Conversely, a government or central bank may decide to devalue its currency in order to boost exports and reduce a trade deficit.

In summary, while both devaluation and depreciation result in a decrease in a currency's value, the key difference lies in the cause: devaluation is a deliberate policy decision, while depreciation is a market-driven process.