Martín Rapetti

Five years of competitive and stable real exchange rate in Argentina, 2002–2007

We argue that the macroeconomic regime focused on the preservation of a stable and competitive real exchange rate (SCRER) has been a key factor explaining the rapid growth experienced in Argentina during 2002–2007. This policy promoted economic growth not only by preserving external and fiscal accounts sustainability, but also by providing incentives to the tradable sector and thus encouraging the expansion of its production, employment and investment. Monetary and exchange rate policies aimed at preserving a SCRER collide with conventional wisdom, particularly with the open economy trilemma. We argue that the critiques based on the trilemma may fail to hold in situations of excess supply of foreign currency and analyze the conditions under which the SCRER policy is sustainable.

The Real Exchange Rate and Economic Growth: are Developing Countries Different?

Recent research has found a positive relationship between real exchange rate (RER) undervaluation and economic growth. Different rationales for this association have been offered, but they all imply that the mechanisms involved should be stronger in developing countries. Rodrik (2008) explicitly analyzed and found evidence that the RER–growth relationship is more prevalent in developing countries. We show that his finding is sensitive to the criterion used to divide the sample between developed and developing countries. Using alternative classification criteria and empirical strategies to evaluate the existence of asymmetries between groups of countries, we find that the effect of currency undervaluation on growth is indeed larger and more robust for developing economies. However, the relationship between RER undervaluation and per capita GDP is non-monotonic, and is limited largely to the least developed and richest countries. This discontinuity constitutes a puzzle that calls for closer analysis.

Macroeconomic Policy Coordination in a Competitive Real Exchange Rate Strategy for Development

Abstract Recent research has documented a positive relationship between real exchange rate (RER) levels and economic growth in developing countries. The literature has interpreted this correlation as causality running from RER levels to growth rates; i.e., more competitive RER levels tend to favor growth. Little effort has been made, however, on the analysis of the policy instruments required to implement a successful competitive RER strategy. An exchange rate policy targeting a permanent change in the RER may run into difficulties: it is well documented that nominal and real exchange rate movements are correlated almost one for one in the short run but such co-movement vanishes in the long run. Targeting instead a transitory RER undervaluation can have long-lasting effects on economic performance if RER competitiveness is stable and durable enough to provide incentives for modern tradable activities to expand. The ability to provide such an environment may be beyond the scope of exchange rate policy. This paper aims to shed light on the complementary policies that facilitate the success of an exchange rate policy that temporarily increases competitiveness. A formal model is developed to analyze these issues. The main conclusion is that a currency depreciation is more likely to accelerate growth if it is simultaneously implemented with domestic demand management policies that prevent non-tradable price inflation and wage management policies that coordinate wage increases with tradable productivity growth.

EXCHANGE RATE REGIMES IN THE MAJOR LATIN AMERICAN COUNTRIES SINCE THE 1950S: LESSONS FROM HISTORY *

The paper analyses exchange rate regimes implemented by the major Latin American (LA) countries since the 1950s, with special attention to the period beginning in the 1970s. The aim is to evaluate the relationship between exchange rate regimes and macroeconomic performance. After an overview of the main trends followed by the major LA countries over the last 60 years, the paper focusses on regimes that were implemented (1) with stabilisation purposes (nominal anchor) and (2) with the aim of targeting competitive and stable real exchange rates. These sections analyse in greater detail some important links between exchange rate regimes and macroeconomic performance. The paper closes with an assessment of the experiences with exchange rate regimes in LA.

The New Millennium Argentine Saga: From Crisis to Success and from Success to Failure

Argentina’s economic performance, since the beginning of the new millennium, has been an object of analysis and intense debate. This is not surprising. The period began with a severe financial and debt crisis. In December 2001, the government announced the largest default on public debt in global financial history. The economy had also sunk into a deep depression: GDP contracted by more than 20% compared to its previous peak in mid-1998, unemployment reached almost 22% of the labor force and half of the population became poor. Rather unexpectedly for most observers, the economy began a rapid and strong recovery in mid-2002, which then turned into rapid and strong economic growth. During this process, employment grew very fast, many tradable services, manufacturing and agricultural activities boomed and non-traditional exports expanded at an unseeing pace. The impact of the global financial crisis of 2008–09 was short-lived and not as severe as in other emerging markets. However, by late 2011, despite the very favorable external context of low interest rates and high terms of trade, the economy started to be constrained by the lack of foreign exchange. In early 2014, it finally faced a balance of payments crisis. As a result, inflation accelerated and output and employment contracted. The full resolution and consequences of this crisis are — at the time we write these lines — still to be seen.