Essay on The Economics of Financial Markets

On April 1, 1991, Argentina’s Congress, with Domingo Cavallo as Minister of Economy, enacted the Convertibility Law (or Ley de Convertibilidad) legally adopting the currency board (Hornbeck, 2002). This legislation essentially pegged the Argentinean peso to the U.S. dollar. The government guaranteed the convertibility of the peso to U.S. dollar at a one-to-one exchange rate, limiting the printing of pesos to only those necessary to purchase dollars in the foreign exchange market. Thus, the central bank was required by law to hold foreign reserves to cover its peso liabilities (Hanke and Schuler, 2002). With this fixed exchange rate, the Argentinean government was hoping to preserve the value of their currency and stabilize inflation. The peg was initially successful, as it cured hyperinflation that occurred at the end of the 1980s and provided price stability needed for economic growth in the early 1990s. However, by the late 1990s,

The foreign currency chosen in the comparison against the U.S. Dollar is the Mexican Peso (MXN) for the years of 2005 to 2010. The Mexican Peso has had a history of periods of stability that have been followed by periods of inflation and devaluations. In 1993 the Bank of Mexico introduced a new currency, the “new peso” which brought more stability to the economy. There was more demand internationally for Mexican stocks and treasury certificates known as Cetes, this kept the New Peso at a stable level of about 3.1 for most of 1993. After briefly reaching 11.50 to the dollar in the late 1990’s, the peso had several years of ups and downs, gaining to less than 10 to the dollar just before the global economic crisis of 2008. Since that crisis

Throughout 1994, Mexico lost significant amounts of reserves trying to stabilise the exchange rate. In 1989 the current account deficit was US$6 billion; by 1991 it had grown to US$15billion, before swelling to approximately US$20billion 1992 and 1993. However, after losing US$1.5billion in reserves over three days in early December 1994, the Government decided to depreciate the Peso by approximately 15%. Within days the Peso plummeted in value as the Government abandoned its new peg, sending the country into the 1994 Mexico financial crisis (Joseph & Whitt 1996).

Before the 60’s Mexico has experience a growth in their economy that was called the “Mexican miracle” because of the growth from 3% to 4% in just few time. However, after this period of growth, what followed was decades of debt. “In the late 1960s, Latin America

In modern times the peso has endured more or less stable against the US dollar and other major worldwide currencies. Although the peso has come under pressure from international recession that is becoming obvious in Europe, One thing that is apparent from making a approximate study of the historical information is that the strength of a currency has a direct relationship with the strength of the economy. As is apparent from the economic disaster experienced by Mexico, during the 1970s and 1980s, which is why the Mexican peso is experiencing distress. As most of the Mexican economy produces its income from exports therefore, it is suffering from a deepening crisis in the global market. On the positive side, the future of the Mexican peso is

With the mortgage crisis recorded in the United States, the country’s currency declined in value in respect to other world currencies. Increase in money supply led to an increase in the volume of money in circulation in the United States. This led to a rise in prices of goods. Because of this, the value of the dollar declined in the international money markets. The decline in value of the dollar led to imports becoming very expensive. This further reduced the country’s production capability, leading to a further economic decline. A devalued currency makes a country’s exports cheaper than those of other countries. This has the potential of boosting the level of exports in countries with devalued currency thus reducing their balance of

Since the 19th century Latin America economies have gown but they have been facing problems that had remained Latin American countries’ bigger economic concern greatly influencing them both politically and economically. Prices of those primary products are slightly rising, but we haven’t seen major improvement in the debt problem, and it is slight mostly because of the expectation in the rises of interest rates.

Compared to South America’s general financial state, Chile is considered a financially prosperous country. Its main imports and exports are copper, natural gas, minerals and petroleum. This is a stable market, allowing the economy to expand. In terms of the exchange rate it is 465.62 Chile Peso to one New Zealand Dollar. Poverty is a big problem in South America, but it’s a problem that Chile is trying to overcome with success. The unemployment rate is relatively low with only 6.0% of the population (2013) unable to gain employment. This is an impressive result comparing it to New Zealand’s unemployment rate being around the 5.4%

Before the 1990s, economic integration in Latin America was overshadowed isolation mechanisms placing barriers between neighboring countries in hopes of developing domestic growth. By the turn of the last decade in the 20th century, more countries became increasingly interested in the potential benefits of deeply integrating nations through cross-border trading. The countries of the Southern Cone of South America courageously took modern economic initiatives. Since then, the region has created mix results of whether their choices have liberated the region of trade barriers or created a fortress all on their own. In this paper I will be focusing on the customs union Mercosur by detailing its creation, discussing the critical events which have contributed to the group’s stagnation, and assessing the group’s current role in the global economy.

In an open and deregulated economic environment, exchange rates can play an important role in macroeconomic management for stability and growth. The increasing role of exchange rates since the early 1970s has indeed been a break from the Bretton Woods tradition of the 1950s and 1960s that assigned a limited role for exchange rates in economic affairs. However, the banking and currency crises of the 1990s that afflicted many developing countries in different regions have provided a somber lesson that in a global economic setting, exchange rate policy, and monetary and financial policy more broadly, cannot be

Such a process can be very time consuming and imprecise, without, of course, having a market currency price to begin with. The exchange-rate system is an important topic in international economic policy. Policymakers and journalists often seem to treat the choice of exchange-rate system as one of the most important economic policy choices that a national government makes, on a par with free international trade. Under most circumstances and for most countries, a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate.

Currency is unreliable. In some countries the United States dollar is worth more than that countries currency, while in other countries the U.S. dollar is worth less. The exchange rate fluctuates on a continuous base which makes the term “funny money” more realistic each day. The purpose of this paper is to discuss hard and soft currency, the South African rand, Cuban pesos, and why the exchange rates fluctuate.

dollar. In dollarization, the country abolishes its own currency and uses a foreign currency, such as the U.S. dollar, for all domestic transactions. 6. Emerging market exchange rate regimes. High capital mobility is forcing emerging market nations to choose between free-floating regimes and currency board or dollarization regimes. What are the main outcomes of each of these regimes from the perspective of emerging market nations? There is no doubt that for many emerging markets a currency board, dollarization, and freely-floating exchange rate regimes are all extremes. In fact, many experts feel that the global financial marketplace will drive more and more emerging market nations towards one of these extremes. As illustrated by Exhibit 2.5, there is a distinct lack of “middle ground” left between rigidly fixed and freely floating. In anecdotal support of this argument, a poll of the general population in Mexico in 1999 indicated that 9 out of 10 people would prefer dollarization over a floating-rate peso. Clearly, there are many in the emerging markets of the world who have little faith in their leadership and institutions to implement an effective exchange rate policy.

A fixed exchange rate regime will offer an economy greater stability in international prices and therefore encourage trade. Additionally, for developing countries a fixed rate will assist in promoting institutional discipline as the country will adopt restrictive monetary and fiscal policies that foster an anti-inflationary environment. A significant weakness of a fixed rate is that it is subject to destabilizing speculative attacks which could lead to financial meltdowns and devastating economic contractions. A floating exchange rate regime allows central banks to combat macroeconomic factors such as unemployment, inflation, and interest rates without having to worry about the effect on exchange rates. However, developing countries whose economies depend on trade will be reluctant to allow their exchange rates to fluctuate freely.

The Lebanese pound is firmly pegged to the American dollar since September 1999. Furthermore Lebanese currency has “undetermined competitiveness, with merchandise exports falling from 23% of GDP in 1989 to 4% in 2000”.