Argentina Money Crisis

Argentina Money Crisis

Introduction

The monetary crisis in Argentina was a financial down turn that affected the economical and political life of Argentina. In the late 1990s and in the early years of 2000s.in economic terms, the critical period started with the decline in the gross domestic product in the late 1990s.the crisis were due to the Argentinean peso which legally pegged the dollar. The ministers thought that this decision would reduce hyperinflation, but it affected the economy of the Argentina in negative way. Therefore, all the foreign investment and the exporter dried up in Argentina, resulting in money crisis.

Discussion

Question 1

In the early years of 1990s Argentina faced high inflation, poor growth of GDP and low levels of capital investment. Due to these reasons, the total deficit increased to 10% of GDP. Since Argentina could not invest in the capital markets itself, it had only one option to finance the fiscal deficit by monetizing them. The government of Argentina increased taxes, thus contributing to the stalling growth.

Another reason that contributed to the currency instability was the fragility of domestic financial institutions. There were many other external factors such as fluctuations in the interest rates. In the early years of 1980s, the United States imposed tight monetary policy, due to which it became expensive for banks to borrow money to maintain their reserve requirements. Therefore, the government of Argentina had a discussion of hot to control the increase inflation and restore stability in currency and the economy. There were there options and the government decided to adopt floating exchange rate (Hill, 2011).

Therefore, the government of Argentina adopted the fixed pegging one to one parity between the peso and the U.S Dollar. They adopted this policy, so that they can establish domestic and international stability and could restore economic growth.

Question 2

The fixed exchange ...