Finance & Accounting
Pages 8 (2008 words)
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.
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. ...