Free «The Exchange Rate Policy in Argentina» Essay Sample


This paper contains the causes of the inflation in Argentina, its causes, policies put in place and the effects of these policies on the country's economy.

Argentina experienced high fluctuation around 1990 that greatly affected the country's economy negatively.  Reports say that the inflation rate reached 95% at around March 1990. Consequently, the country's economy went down and in turn putting the citizens in many problems of trying to cope with the situation. There was an increase in the prices of goods, the interest rates and difficulty in running other businesses. This was brought about by the change in the fiscal and monitory policies in the country that went further to affect the country's GPD. Then, the GPD went down for a long time (Takagi, et al 2007).  

Another effect of this hyperinflation in Argentina is that the government and the central bank lost their self confidence. The levels of investment were also affected in that they went down. There was a collapse in the real wages by half while the rate of poverty went up from 27% in 1980 to 47% in 1989.  In addition, there was the reduction in the fixed investment in the industrial sector (Johnson & Fund, 1985).

There are various reasons that led to the inflation in Argentina. One of them is the uncontrolled growth of money supply in the country. Research shows that the fiscal deficit rose in 1983 due to the increase in the amount of losses and the evasion of tax. As a result, the country could not effectively take part in the world market. The government then imposed inflation tax so as to pay off the fiscal deficits (Mussa & Fund, 2000).

The weakness of the country's financial institutions was another cause of the unsteadiness of the Argentina's currency. The country had a crisis at the banks and this caused the unsteadiness. Subsequently, the central bank decided to take away the commercial bank deposits in an attempt to beat the issue of liquidity in the country. Researchers reported that the there was an increased limitation on the country's credit to the public sector. It further shows that the private sector was only allocated about 45% of the total home credit. Consequently, the money supply in Argentina dropped as some of its citizens owned more than US$50 billion in other countries (Takagi, et al 2007).

There are other external factors that also contributed to the currency crisis in Argentina. One of these factors is the change in the interest rate. Other countries raised their interest rates on the money borrowed by the Argentina's government. One of these countries is the U.S. which tightened its financial conditions on its own financial institutions. This in turn made it very expensive to borrow money from its banks because of the increased reserve requirements. There was also a policy of the Central Bank Circular 1050 which was made in 1980. The policy fixed the payments in monthly installments to the U.S dollar's value. This led to the rise in the charges hence bringing down the country's financial confidence further, especially during the reign of the Central Bank President Domingo Cavallo. His decisions brought the country's economy (Takagi, et al, 2004).

Consequently, the new Central Bank President; Carlos Menem also put in efforts to bring things with the country's economy but he did not succeed. Instead, his attempt brought up depreciation of the austral (the Argentina's currency between 1985 and 199). This in turn led to the decline in the foreign currency reserves in the Central Bank (Takagi, et al 2007).

Another attempt by Carlos to stabilize the country's currency is the adoption of a policy called neoliberal's. This is a policy that involved the great privatization and simplification of the labor laws. This in turn attracted foreign investors who flocked the country with a lot of money so as to fund its fiscal deficits.

Then, further attempts to put things in order included the three alternatives that were discussed by different people. These were the floating exchange rate, a super exchange rate and the hybrid system.  The hybrid system involved the different levels of control on the exchange rates. The system was then left out when it was discovered that a semi-fixed exchange rate was not appropriate because it gave a chance to those countries with poor monitory policy to engage in a lot of discretionary power (Engel, 2010). Therefore, the government had to work with either the completely floating or the fixed exchange rates.

As a result of the discussion on which currency to peg the peso with, some suggested that it should be pegged against the U.S. dollar since it has the ability to provide ease in understanding, a lot of safety, a higher international credibility and an agreement to raise trading activities with the U.S. Subsequently, the currency board came up with a fixed pegging between the peso and the U.S. dollar. This also ensured that there was complete convertibility of the pesos to the U.S. dollars. All this was done in order to stabilize the Argentine currency and encourage more foreign and local investment in the country (Mussa & Fund, 2000).

Argentina's other attempt to stabilize its currency was through the Convertibility program. This involved the creation of the currency board that had a fixed exchange rate of 10000 australes per U.S. dollar. Here, the board was expected to give complete support in the U.S. dollars whenever there were australes given out and for the peso. Also, the U.S. dollar was made as lawful tender in Argentina.

However, the currency board laws were very strict in that they restricted the government from running fiscal deficits and fund them by making more money. It also restricts the Central Bank from going after a dynamic monitory strategy. This meant that the citizens could exchange their goods and assets for home currency at affixed rate. In addition, they were allowed to have more foreign currency at a fixed exchange rate. These rules were aimed at limiting the government's economic strategy alternatives. More so, they were meant to give the citizens an assurance of no more risks in having more domestic currency than the foreign currency (Takagi, et al 2007).

This program indeed helped the country economic point to enhance. It led to the fall of the inflation rate from the monthly rate of approximately 11% in 1991 to 8% in 1993. The exchange rate has increased because the rate of inflation did not decrease with the fixed exchange rate. This in turn led to the decline in the trade balance and the present account.

This program also assisted in the creation of the credibility of the macroeconomic steadiness in Argentina. However, there were negative effects of the program on the economic crisis that became a main challenge to the Argentinean macroeconomic strategy. Instead, the country took up other contractinary policies and the emergency debt pack up that enabled the country to put up with the problem (Engel, 2010).

The establishment of the currency board was aimed at slowing down the rate of inflation in the country. It was also geared towards the renewal of the economic progress in the country. It therefore did reduce inflation from approximately 3000% in 1989 to 3.4% in 1994. The GPD growth was also noticeable in that it moved from 8% between 1991 and 1995 to 6% in 1998.

Another improvement was on the international trade. It greatly improved in that the imports increased the US$11.6 billion in 1991 to US$32.3 billion in 2000. The same thing happened to the exports. They increased from US$12.1 billion in 1991 to US$30.7 billion in 2000 (Mussa & Fund, 2000).

On the contrary, this affected the social issues in the country negatively. One of the ways in which this affected the society is by raising the rate of unemployment in the country. There was lack of equal distribution of income, raised poverty levels and the decline in the salary rates. Research shows that the unemployment rose from 6.1% in 1991 to 15% in 2000 with a rise in the in the price competition (Takagi, et al 2007). This led to the domestic companies to invest more in technologies that needed little workforce and bigger productivity.


The exchange rate policy in Argentina greatly affected the economy of the country. Those policies that were put in place had both positive and negative impact on the country.


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