StudentShare solutions
Triangle menu

The Role of the Exchange Rate Regime in Contributing to the 2001 Crisis in Argentina - Essay Example

Nobody downloaded yet

Extract of sample
The Role of the Exchange Rate Regime in Contributing to the 2001 Crisis in Argentina

Argentina underwent structural changes in the 1990’s. In the late 1980’s, Argentina suffered high levels of inflation. Thus, in the 1990’s, the administration of president Menem implemented several reforms to overcome the country’s macroeconomic instability through the Convertibility Plan (Rodriguez – Boetsch 2005, p.302). Inflation dropped to single digits, whereas economy remained stable (Rodriguez – Boetsch 2005, p.302). Moreover, the country underwent privatization, deregulation, and trade liberalization (Rodriguez – Boetsch 2005, p.302). Until the crisis in 1998, Argentina was viewed as a success story and a role model. The currency board was created to conquer inflation and create deflationary expectations among the general populace. As part of the Convertibility Plan, the board was created to enhance confidence among investors, population, and anyone in power to set prices in the Argentinean market (IMF 2003, p.4). To stabilize the economy, the board pegged the Argentine peso to the US dollar at 1:1 (Rodriguez – Boetsch 2005, p.307). Moreover, it linked the supply of pesos to the quantity of US dollars held in Central Bank reserves (Rodriguez – Boetsch 2005, p.307). Money supply depended on the US dollar reserves. Since the Argentinean peso was pegged 1:1 to the US dollar, the money supply was determined in the same way. For example, assume there was only one dollar in the Central Bank’s reserves. Then the money supply would be one Argentinean peso times the money multiplier. Now assume that an additional dollar is bought by the Central Bank and put in reserves. This increase in reserves translates into an increase in money supply. Namely, one additional peso is put into circulation. However, this is not the end of the analysis. In every economy, a stock of value changes hands several times within a given time period. Thus, this additional peso needs to also be multiplied by the money multiplier. This relationship is described in equation (1) below, where is money supply, is monetary base and is the money multiplier (Gokbudak 1995, p.111). (1) Money multiplier, in return, is determined by the required reserve ratio (Rodriguez – Boetsch 2005, p.308). This definition can be seen in equation (2), where is the money multiplier, and is the required reserve ratio determined by the Central Bank. (2) The board eliminated previously available options. Monetary policy was no longer an option. Under a floating regime, the central bank can sell or buy securities and so through open market operations control the interest rate, which in turn determines the cost of money and can offset inflation. Since this policy was not an option, only fiscal policy remained. The labor market also needed to become flexible in order to absorb some of the possible shocks (IMF 2003, p.8, 26). However, with 70 percent of federal budget going to social security and provinces, little maneuvering space was left for the fiscal policy (IMF 2003, p. 13). There are several causes of the crisis. The IMF (2003) considers this crisis to have been caused by the interaction between fiscal policy and the currency board arrangement. The crisis is also seen as an outgrowth of fragile balance sheets in the undeveloped banking sector and lack of political strength to implement a reform. Public sector debt is seen as a trigger which, coupled with previous history of economic slumps, led to the above causes (IMF 2003, p. 4). Following ...Show more

Summary

The role of the exchange rate regime in contributing to the 2001 crisis in Argentina Name Institution name Five years before the start of the deflation that escalated in 2001 Argentina was viewed as a model to the rest of the Latin America. It experienced economic growth, while inflation was reduced and controlled…
Author : auerdeonte
The Role of the Exchange Rate Regime in Contributing to the 2001 Crisis in Argentina essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"The Role of the Exchange Rate Regime in Contributing to the 2001 Crisis in Argentina"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Economic Crisis in Argentina
This essay mainly focuses on determining certain sets of economic policies, conducted by Argentinian government in the early 2000s, that contributed to the cessation of the economic crunch. On the economic front, the government abandoned convertibility, encouraged industrial reactivation, and introduced price control measures.
6 pages (1500 words) Essay
Should China adopt a flexible exchange rate regime
China has benefited immensely from the international trade. According to Bradsher (2010), China is one of the countries that enjoys trade surplus and high level of foreign exchange reserves in the world. In 2009, China had a trade surplus of $198 billion with the rest of the world.
10 pages (2500 words) Essay
Discuss the interrelationship between the exchange rate regime and viability of the alternative approaches to resolving a balanc
It has therefore also become a policy problem for not only the governments but also for the economists to underline a systematic approach to tackle the issue of balance of payment disequilibrium. (Kenen, 2000) The interrelationship between the balance of payments and the exchange rate regimes is one of the key relationships in economics.
7 pages (1750 words) Essay
Influence of Exchange Rate regime on Effectiveness of Monetary Policy
This model is among the most popular standard macro models that explains different characteristics of an open economy. An open economy is an economy in which a country trades with other countries in goods, services, and financial assets (Redseth 2000). Most of the economies in the current world are open due to globalization of trade.
6 pages (1500 words) Essay
Japan Exchange Rate Regime
However, the administration was carried out with the cooperation of the Ministry of International Trade (MITI) and Industry and the bank of Japan. MITI also handled licenses related to exports and imports. However, the authority for approving major payments was given to the authorized banks in Japan.
5 pages (1250 words) Essay
The Exchange Rate Regime of Thailand, purchasing power parity of Thailand
Malay, Mon and Khmer civilizations flourished in the reason prior to the arrival of ethnic “Tai”. Geographically the area of Thailand is 513,115 sq. km; equivalent to the size of France, or slightly smaller than Texas. Beautiful city of Bangkok is the capital of
16 pages (4000 words) Essay
Exchange rate regime in Kazakhstan
mitted to Kazakhstan through channels which include, "lost competitiveness, shrinking bilateral and global markets, terms of trade shocks and shifting foreign direct investments"(Ohno and Zhakparova, 1999, p.1).With the adoption of floating regime, temporary non-market steps
8 pages (2000 words) Essay
Latin american countries economy
It should be noted that Brazil faced problems related to high inflation rates between the periods of 1970 and 1990. The authors of this article argue that the stabilization program implemented in Brazil in 1994 helped Brazil to control growing inflation rates. This
6 pages (1500 words) Essay
Summaries the history of the exchange rate regime in Japan
MITI also handled licenses related to exports and imports. However, the authority for approving major payments was given to the authorized banks in Japan. Studies reveal that trade in Japan was being regulated by the government directly before 1949 (Ziemba , Bailley,
5 pages (1250 words) Essay
Economic globalization of Argentina
out in Argentina in the 90s set its economy on a path to sustained growth, after the country’s financial difficulties and poor economic performance that resulted to hyperinflation towards the end of the 80’s. Argentina undertook plans that led to financial systems, tax and
6 pages (1500 words) Essay
Hire a pro to write
a paper under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Click to create a comment