Currency Devaluation and Its Effects on the Economy. Focus on Argentina.

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| Currency devaluation and its effects on the economy | Focus on the Argentine economy | Agustina DalFabbro, Michele Mottola, Giuseppe Merlino, Saskia Diehl 26.05.2012 | Inhalt 1. Introduction 2 2. Convertibility and its problems in the 1999/2001 period 2 1.1 Previous Devaluation Process in Argentina 2 2. First moments of devaluation 3 2.1 Fixed exchange rate vs. floating exchange rate regimes 3 2.2 Two types of exchange rates and free floating currency 5 2.2 Free floating currency 6 3. Effects of Devaluation process on 6 3.1 Trade Balance 6 3.2 Productive capacity 6 3.3 Salaries 6 3.4 National Accounts 6 4. Conclusion 6 5. Literature 7 1. Introduction Stable currency exchange rate regimes…show more content…
Since the volatility of floating rates causes costs for exports and imports. It also encourages international capital flows which can profit the welfare of a country. Especially in case of developing countries these capital flows can be very large. One big Problem of the exchange rate regimes is the loss of monetary and fiscal possibilities to stabilize the economy as well as Limitation of the ability to pursue domestic goals. There is a slight difference between a hard peg and a fixed exchange rate, since the fix exchange rate can be with several countries whereas the hard peg only pegs it currency to one foreign country. They have more or less the same ad- and disadvantages, but with a fixed exchange rate, which is pegged to more than one country, the pursuit of domestic goals is easier, since the country does not depend on one foreign economy. One major weakness of the fixed exchange rate is, that when devaluation becomes necessary through fundamental changes in economy. Even the announcement of devaluation creates the danger of a crisis and eventually ends in a crisis, like the case of Argentina shows. It is also likely that a currency crisis after devaluation can end up in a banking crisis, since fixed exchange rates give incentives to take on debt. (see below for further information) Floating exchange rates can be found for example in the arrangement of the U.S. with their
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