A Review On Currency Devaluation - 1120 Words

Introduction Imagine you are in charge of economic policy in your country. Inflation starts to creep up. The value of your currency is losing ground which is making the debt you incurred even greater. Now your GDP is affected as you struggle, trying to figure out the best response for both short term and long term economic health. This is what Argentina faced in the late 1900’s after many decades of prosperity. Even the best intended responses to an economic crisis may or may not correct the situation or may even exacerbate it, as outlined in the Case Study by Gerber (2010) in Argentina. A review of currency devaluation will set the stage for an analysis of the case and Argentina’s response to their lengthy crisis. Currency†¦show more content†¦In 1900, Argentina was one of the richest countries in the world, but then by 1950 an income gap started to form as the U.S. and Europe’s incomes caught up and passed Argentina. Then the Latin American debt crisis struck in the 1980’s along with the Lost Decade of the 1980s and Argentina’s GDP fell 7 percent while at the same time inflation skyrocketed by more than 3,000 percent. Several experiments were performed with no clear success until they fixed their currency to the U.S. dollar at 1:1 and restricted the printing of money. In 1990, Argentina created a currency board to enforce rules and monitor exchange rates which was successful through 1998 until an economic crisis in East Asia caused Brazil to devalue its currency placing Argentina firms at a disadvantage leading to a negative current account balance in Argentina of 4 percent of the GDP leading to a 1999 recession. With Argentina total expenditures down and a recession in place, a demand-side stimulus would be in order including cutting taxes, increased government spending, and increasing the money supply however, there were problems with these changes. The 1:1 ratio and raising prices by expansionary policies were seen as problematic and even counterproductive. Currency devaluation would also be a problem as they borrowed dollars during all the growth years and the decreasing value of the Peso