{"id":9764,"date":"2023-08-07T16:36:53","date_gmt":"2023-08-07T19:36:53","guid":{"rendered":"http:\/\/fund.ar\/publicacion\/the-foreign-exchange-market-in-the-spotlight-transition-to-unification\/"},"modified":"2023-12-14T15:51:17","modified_gmt":"2023-12-14T18:51:17","slug":"the-foreign-exchange-market-in-the-spotlight-transition-to-unification","status":"publish","type":"publicacion","link":"https:\/\/fund.ar\/en\/publicacion\/the-foreign-exchange-market-in-the-spotlight-transition-to-unification\/","title":{"rendered":"The foreign exchange market in the spotlight. Transition to unification"},"content":{"rendered":"\t\t
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The exchange market is full of different quotations and the gaps between them encourage speculation instead of production. Argentina has dollars, but they are not in its Central Bank nor are they activating the economy. Can we get out of this labyrinth? How? This document offers an analysis of the possible alternatives in the transition towards exchange rate unification.<\/strong><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Ilustraci\u00f3n: Natalia Aguerre<\/a><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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The current exchange rate regime does not meet any of its possible objectives. It does not buffer external shocks, it does not promote local production or competitiveness, and it is definitely not helping to curb inflation or improve income distribution. It is also clearly unsustainable, given the ongoing loss of international reserves by the Central Bank (BCRA). A reform is imperative. Argentina should transition towards a unified exchange market that would eliminate the existing incentives, which preclude any growth or disinflation process. This transition is by no means simple. Immediate unification may result in a significant rise in the exchange rate and unleash a very dangerous inflationary spiral.<\/span><\/p>\n

Even in the current economic climate, there is plenty of room for action. How can we move towards unification? This paper proposes the use of a temporary dual exchange rate to moderate the initial jump in the exchange rate and its inflationary effects, while also allowing for the accumulation of international reserves to prepare for the definitive unification regime. We have evaluated this option and compared it against unification compensated by an increase in export duties withholdings, and analyzed the considerations to be taken into account in making this choice.<\/span><\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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What is behind the dollar exchange rate<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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The value of the dollar has significant implications in countries like Argentina. It impacts the domestic price of goods and services, as well as the convenience of manufacturing products locally, importing them or eventually exporting them. Additionally, it affects financial decisions involving the negotiation or performance of dollar-denominated contracts. Understanding this can help determine the best way to maintain or increase the purchasing power of savings. The value of the dollar also has a considerable impact on economic and employment growth, inflation, income distribution and poverty. All in all, a consistent exchange policy is critical to set the country\u2019s macroeconomic policy.<\/span><\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Exchange rate and policy objectives<\/h4>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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Exchange rate<\/strong>. It is the amount of one currency required to acquire the currency of another country. In general, we refer to the quotation of the U.S. dollar in Argentine pesos.<\/span><\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Exchange rate fluctuations (or lack thereof) may be desirable for a variety of reasons:<\/span><\/p>

  • To facilitate the absorption of external shocks. An adjustment of the exchange rate can prevent the full impact of an increase in the international price of goods exported by an economy from affecting domestic prices.<\/span><\/li>
  • To contribute to the competitiveness of the economy. A high exchange rate can reduce costs in dollars, ultimately improving competitiveness.<\/span><\/li>
  • To attempt to curb inflation. When the value of the dollar increases less than prices, this usually slows down inflation rates.<\/span><\/li><\/ul>

    \u00a0<\/p>

    Some of these objectives may seem contradictory. Some will be better served by a lower exchange rate (in the context of inflation and income distribution), while others need a higher exchange rate (competitiveness). Similarly, some require a greater degree of stability (competitiveness and currency mismatch), while more flexibility is needed in other situations (buffer of exogenous shocks).<\/span><\/p>

    Exchange rate adjustments can be used as a tool to achieve some of these goals, but not all at once. In fact, frequent changes in the prioritization of exchange rate objectives may lead to a highly volatile, erratic and counterproductive exchange rate policy.<\/span><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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    Argentina\u2019s experience in recent years<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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    Foreign exchange market<\/strong>. A market in which foreign currency is bought and sold and where the exchange rate is hence determined.<\/span><\/p>

    Exchange rate regime\/scheme<\/strong>. Rules and practices that determine how the exchange rate is set. Specifically, these regimes are defined in terms of the degree of freedom with which the price of the dollar can respond to changes in supply and demand. Regimes with greater flexibility allow the exchange rate to be defined mainly by private and non-financial public sector supply and demand. In contrast, under less flexible regimes, the central bank establishes a target price and intervenes by buying and selling dollars to keep it within a certain range.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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    Our country has historically experienced tensions in the foreign exchange market; however, the policies adopted and the nature (and origin) of these tensions have varied over time. Since 1991, Argentina has implemented numerous combinations of exchange rate, monetary and capital flow regulation policies: fixed exchange r<\/span>ate (1991-2001); dirty floating exchange rate\u2014high (2002-09); dirty floating exchange rate\u2014low (2010-23); at times, with free movement capital (2010-11 and 2016-19); at times, with capital movement restrictions (2011-15 and 2019-23); and, even brief attempts have been made to implement inflation target regimes or target-zone flotation schemes.<\/span>
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    The current situation<\/h4>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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    Exchange rate gap<\/strong>.<\/strong> It describes the difference between the official exchange rate and non-official rates. For instance, the official value of the dollar versus the “<\/span>blue<\/span><\/i>” or \u201c<\/span>informal<\/span><\/i>\u201d dollar.<\/span><\/p>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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