Domino theory

Devaluing currencies can set off chain reactions that are damaging to a global economy. In Southeast Asia and some other parts of the world, it seems as though the value of individual currencies has been falling like a stack of dominoes. It's happening because the countries in these regions rely heavily on foreign trade to fuel production, feed their populations, and create foreign exchange reserves to maintain purchasing power. Using a two-country model, we can illustrate how this leads to a type of domino effect when a country devalues its currency. If country "A" devalues its currency, for ...

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From the Print Issue

October 2009

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