Assessing the Impacts and Policy Alternatives
Edited by Gerald A. Epstein and A. Erinc Yeldan
Chapter 9: Five Years of Competitive and Stable Real Exchange Rate in Argentina, 2002–07
Roberto Frenkel and Martín Rapetti1 INTRODUCTION 9.1 In 1991 Argentine authorities established the convertibility regime, which implied the pegging of the peso (AR$) to the US dollar ($) by law and the validation of contracts in foreign currencies. The new monetary arrangement also stipulated that the central bank must fully back the monetary base with foreign reserves,2 what in practice turned the central bank into a currency board. The convertibility regime was the pillar of a broader stabilization program, intended to take the economy away from the high inflation regime settled since the mid 1970s, which had led to two brief hyperinflationary episodes in 1989 and 1990. The program also included an almost complete liberalization of trade flows and the full deregulation of the capital account of the balance of payments. It was jointly applied with an impressive process of market-friendly reforms, targeting the privatization of a large proportion of state-owned firms. The program successfully managed to stop inflation and initially spurred rapid growth. However, as happened with many other stabilization programs in the region, it led to the appreciation of the real exchange rate, which made economic growth highly dependent on external debt accumulation.3 Since the Asian and Russian crises, and especially after the Brazilian devaluation in 1999, the deceleration of capital inflows put the economy into a deflationary trend that ended up in a financial and external crisis in 2001–02. Between the last days of 2001 and the beginning of 2002, Argentina declared the default of...
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