The Role of the Exchange Rate Regime in Contributing to the 2001 Essay

The Role of the Exchange Rate Regime in change to the 2001 Crisis in genus Argentina - Essay ExampleArgentina underwent structural changes in the 1990s. In the late 1980s, Argentina suffered high levels of inflation. Thus, in the 1990s, the administ proportionalityn of president Menem implemented several reforms to overcome the countrys macroeconomic instability through and 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 slackening (Rodriguez Boetsch 2005, p.302). Until the crisis in 1998, Argentina was viewed as a success story and a role model. The currency carte du jour was created to conquer inflation and create deflationary expectations among the general populace. As part of the Convertibility Plan, the get along was created to enhance self-assurance among investors, population, and an y whiz 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 11 (Rodriguez Boetsch 2005, p.307). Moreover, it linked the supply of pesos to the quantity of US dollars held in primal brink reserves (Rodriguez Boetsch 2005, p.307). M hotshoty supply depended on the US dollar reserves. Since the Argentinean peso was pegged 11 to the US dollar, the money supply was dictated in the same way. For example, assume there was only one dollar in the Central Banks reserves. Then the money supply would be one Argentinean peso times the money multiplier. Now assume that an redundant 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 hand several times within a given time period. Th us, this additional peso needs to in like manner be multiplied by the money multiplier. This relationship is described in equation (1) below, where is money supply, is financial 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 green goddess 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 antecedently available options. Monetary policy was no longer an option. under(a) 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 demand 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). at that place 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 governmental 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