maintaining the Argentine peso at its current value in real effective terms, or reducing it further, as the government has suggested, without drastically changing the fiscal and monetary policy mix will ultimately, become unsustainable.
Washington, DC (PRWEB) July 14, 2008
The Group of Thirty (G30) released "Distorting the Micro to Embellish the Macro: The Case of Argentina," an occasional paper by Domingo Cavallo and Joaquín Cottani. In this extremely timely paper, Cavallo and Cottani discuss the fallibility of Argentina's "New Economic Paradigm" and the reasons for its longevity. The authors address the use of real exchange rate targeting (RERT), a mix of policies to manage the real exchange rate (RER) at a low level that aims to promote exports and reduce the vulnerability of the economy to future crises, and the extent to which this has been effective. The authors analyze whether Argentina has succeeded in this drive to deliver a stable low real exchange rate or whether, to the contrary, the policies required to keep the RER down significantly distort other aspects of the micro-economy to an extent that it is not a sensible option.
Cavallo warns that "maintaining the Argentine peso at its current value in real effective terms, or reducing it further, as the government has suggested, without drastically changing the fiscal and monetary policy mix will ultimately, become unsustainable."
Should external factors turn negative, Cavallo states, "Argentina's twin surpluses, external and fiscal, will vanish and the real exchange rate will depreciate rather than appreciate." Cavallo continues, "The risk is that, in this context, the government will lose control of inflation and the economy will stagnate."
The Group of Thirty, formally known as "The Consultative Group on International Economic and Monetary Affairs, Inc." was founded in 1978. The Group of Thirty is a private, nonprofit, international body composed of senior representatives of the private and public sectors and academia. The Group aims to deepen understanding of international economic and financial issues, to explore the international repercussions of decisions taken in the public and private sectors and to examine the choices available to market practitioners and to policymakers. The Group is led by Paul A. Volcker, Chairman of Trustees, and Jacob A. Frenkel, Chairman of the Group.