Case Analysis 1: Argentina's Monetary Crisis

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1. How did the fixed exchange rate against the dollar that Argentina adopted in the 1990s benefit the economy?

Having a fixed exchange rate against the dollar allowed the economy to know and plan for the future. Argentina also had a very high interest rate, and this allowed them to bring it down. This will also encourage trade to increase.

2. Why was Argentina unable to maintain its fixed exchange rate regime? What does this tell you about the limitations of a fixed exchange rate regime?

They could not maintain the fixed exchange rate because of the decline in world economic growth. They were linked to the dollar and many countries currency was losing ground to the dollar. Making the products produced in Argentina too expensive. The limitations with a fixed exchange rate are just that fixed. There is no movement with the economy.

3. Do you think that the IMF was correct to insist that the Argentine government adopt a fiscal austerity program? What other approach could the IMF have taken?

I do believe that they were correct to insist on the program. They had a lot of money invested and had to insure it was going to be repaid. They also could have given them a short time period to see if they could correct the problem themselves.

4. In the end, the Argentinean government was forced to abandon its peg to the dollar. In retrospect was this a good thing? Why? What are the risks inherent in a floating exchange rate?

It was a good thing. It allowed further trade and exports increased. The products were more attractive to the global market. The risk with a floating interest rate is the lack of planning. There is no way of telling when the rate will move. Makes it harder for business and people to invest.

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