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

Words: 1939
Pages: 8

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

Agustina DalFabbro, Michele Mottola, Giuseppe Merlino, Saskia Diehl

Inhalt 1. Introduction 2 2. Convertibility and its problems in the 1999/2001 period 2 1.1 Previous Devaluation Process in Argentina 2 2. First moments of devaluation 3 2.1 Fixed exchange rate vs. floating exchange rate regimes 3 2.2 Two types of exchange rates and free floating currency 5 2.2 Free floating currency 6 3. Effects of Devaluation process on 6 3.1 Trade Balance 6 3.2 Productive capacity 6 3.3 Salaries 6 3.4 National Accounts 6 4. Conclusion 6 5. Literature 7

1. Introduction
Stable currency exchange rate regimes
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The main economic advantages of floating exchange rates are that they leave the monetary and fiscal authorities free to pursue internal goals. They can concentrate to generate full employment, stable growth, and price stability. Exchange rate adjustment often works as an automatic stabilizer to promote those goals.
One main disadvantage of floating exchange rates is, that the exchange rate volatility and uncertainty, concerning costs on trade and investments, may discourage international investment. If foreign investment is a main source, as it is the case for most developing countries, floating exchange rate may impose real costs, not only for the exporters but also for the whole society.

Whether a country should choose a fixed or a floating exchange rate depends on the dependency of the country on their neighbors and therefore their sensibility to external shocks. If it is very dependent on their neighbors and especially their neighbors’ economy the country is better of with a fixed exchange rate. But if the country is economically independent, a floating exchange rate would be the better choice in order to favor macroeconomic stability.
2.2 Two types of exchange rates and free floating currency

As the era of the currency board of Argentina was described earlier, the following focuses on the measures taken after the default of Argentina.

The government chose a mixture of the two strategies mentioned before. Duhalde