Exchange Rate and Monetary Policy After the Convertibility Regime Collapse

The currency board (Convertibility) collapsed between December 2001 and January 2002, after almost 11 years in force. The trends leading to the meltdown continued in the following months, plunging half of the population into poverty and one third into extreme poverty. Only six months later, the government managed to stabilize the exchange rate and, from that moment onwards, the monetary and financial operation of the economy started to return to normality, contributing to the recovery of the economic activity that had commenced some months before, fostered by import substitution. Since then, the Argentine economy has followed a path of recovery and growth that exceeded even the most optimistic forecasts. There is a broad consensus about the fact that this growth phase is based on healthy fundamentals, unlike past experiences of the country. In particular, the current macroeconomic configuration is characterized by surplus in fiscal accounts and in the current account of the balance of payments. This is an unprecedented feature in the Argentine economic history of the second half of the 20th Century, a period characterized by high growth volatility. Several factors have contributed to the setting of the current macroeconomic regime. The international context has been a favorable element, due to the high prices of the products exported by our country and to the low interest rates. Nevertheless, it seems to be indisputable that the main factors behind the current developments have a domestic origin. Public spending control, tax management and, especially, the public debt restructuring completed at the beginning of 2005 were key factors to achieve the (current and projected) solvency of the fiscal accounts. In turn, the exchange rate policy, aimed at preserving a Competitive and Stable Real Exchange Rate (TCRCE, for its designation in Spanish), favored the reversal of the current account deficit, mainly by generating sizable trade surpluses. Moreover, it played a predominant role in the fast GDP growth since it stimulated tradable sectors’ activities and fostered a labor-intensive growth, resulting in a quick decline of the unemployment rate. Despite its many achievements, the TCRCE policy has not been free from criticism and debate. Many domestic and foreign analysts recognize its positive effects on external accounts, on growth and on employment, but they are skeptical about the possibility of keeping it over time. Their objections are mainly related to alleged inconsistencies in the monetary and exchange rate policy management within a context of international financial integration.