Currency Devaluation and Its Effects on the Economy. Focus on Argentina.

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Currency devaluation and its effects on the economy
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Focus on the Argentine economy |

Agustina DalFabbro, Michele Mottola, Giuseppe Merlino, Saskia Diehl 26.05.2012
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Inhalt
1. Introduction2
2. Convertibility and its problems in the 1999/2001 period2
1.1Previous Devaluation Process in Argentina2
2. First moments of devaluation3
2.1 Fixed exchange rate vs. floating exchange rate regimes3
2.2 Two types of exchange rates and free floating currency5
2.2 Free floating currency6
3. Effects of Devaluation process on6
3.1 Trade Balance6
3.2 Productive capacity6
3.3 Salaries6
3.4 National Accounts6
4. Conclusion6
5. Literature7

1. Introduction
Stable currency exchange rate regimes are a key component to stable economic growth (http://www.policyarchive.org/handle/10207/bitstreams/1311.pdf)

2. Convertibility and its problems in the 1999/2001 period

1.1 Previous Devaluation Process in Argentina

Three main large devaluation episodes prior to the monetary reform of 1991 can be identified in the graph: 1975-1976 (the so called “Rodrigazo”), 1982-1984 (the “Post Malvinas War” monetary collapse) and 1989-1990 (the “Hyperinflation”). (http://www.cavallo.com.ar/wp-content/uploads/2012/05/Devaluation-and-Inflation-.pdf)

2. First moments of devaluation

Basically you can distinguish three half-year periods centered on the political and financial collapse at the end of 2001 namely: Precollapse (to September, 2001); Collapse (October 2001 to March 2002); and Depression (from April 2002). This section will focus on the end of the Collapse and the beginning and ongoing Depression.

As earlier mentioned Argentina applied a currency board at the beginning of the 90’s which pegged the peso to the dollar and formed a fixed exchange rate. After the Crisis of Argentina had begun they had to decide how they can diminish the effect of the emerging depression. In December 2001 Argentina officially defaulted and in February 2002, the value of the pesos was almost half of the dollar, Eduardo Duhalde became president. He had to manage a country which was in a really bad condition.

Different economists favored different strategies to stabilize the economy. Some favored a “pesification followed by a free-floating regime” and others “devaluation and subsequent dollarization”. Both of those possibilities are heavily discussed between the leading economists worldwide. After the financial crises in the 1990’s they suggested for developing countries to choose a corner solution and all intermediate exchange rate regimes were dismissed in order to be too risky. But in 2003, after the crisis of Argentina had reached its peak, the bi-polar view might be a good solution as well. The next section will be examine what Argentina did try to escape the crisis, after they had already implemented a currency board (fixed exchange rate), which eventually, with a lot of accompanying factors, evoked the crisis. They actually started floating their currency and implemented several other measures to save their economy. If this mixture of policies was successful will be analyzed in the following. 2.1 Fixed exchange rate vs. floating exchange rate regimes

For a better understanding what the next section is talking about, a brief introduction about the different exchange rate possibilities and their advantages and disadvantages will be implemented. A fixed exchange rate regime can be created in three different ways. The first two are either a Soft Peg or a Hard Peg of the currency. Hard Pegs are for example currency boards or currency Unions (Eurozone) and mean a complete fix to the currency of a foreign country (e.g. the currency board of Argentina pegged the Peso to the Dollar). Soft Pegs are the less strict version and link to other currencies is less direct. The third possibility is a fixed exchange rate peg to several countries. The main focus of this paper lies on the currency...
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