US dollar devaluation?

Should the dollar be devalued by deliberate US Government policy? There have been recent discussions among economists and in the media about the benefits and problems associated with the dollar having a weaker role in the international economy. Here's a report coming out of Russian media today, for example.

Devaluation would probably not be a matter of deliberate exchange rate fixing by the US government, but rather taking measures to make the currency less valuable, such as inflating the domestic economy by expanding the money supply with national output growing more slowly. Then the currency would be less valuable against other currencies and US exporters would find that their prices are lower when denominated in foreign currencies.

Devaluation could also increase welfare if there is monopolistic competition in international product markets. Under monopolistic competition, the market structure and profit maximisation motivations of companies combine, and products which could be sold profitably are not produced. Slight one-sided changes in exchange rates correct for the deficit if the companies are reluctant to adjust their prices in the face of small changes caused externally.

Devaluation has a bad reputation from the 1930s, as repeated competitive devaluation across countries is asserted to have contributed to collapses in trade. Some economists have claimed on the other hand that the devaluations in fact had small effects on trade in reality. Still other economists have asserted that it is not the actual devaluation or trade falls that primarily lead to the problem, but rather the discouragement to investment which they represent that leads to greater economic damage.

Whatever the merits of devaluation, the US Government may not actually have to undertake any active policy to devalue the currency if the implicit or explicit debates continue, since the worries about potential devaluation may lead to a small flight from the dollar and a small devaluation, which may be optimal from the US Government viewpoint.