The monetary crisis, dollarization and the exchange rate

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The monetary crisis, dollarization and the exchange rate

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The purpose of this paper is to contribute to the debate on stabilization policies in conditions of high inflation in the light of the experience of Brazil and some other countries, especially the European monetary crises of the 1920s and the stabilization of the Argentine currency in 1991/1992. The paper begins with some comments on certain special features of situations of high inflation, with emphasis on the unfeasibility of following the sequence of measures recommended for dealing with only moderate imbalances. It goes on to criticise some aspects of the economic policy adopted in Brazil in 1991/1992, demonstrating this policy's inability to break out of a vicious circle in which monetary instability and fiscal imbalances mutually aggravate each other. It is asserted that in certain circumstances stabilization can lead to regression to a more primitive type of monetary system, namely the abandonment of pure flat money based exclusively on authorization and sanction by the State. The anti-inflation policy applied in Argentina since April 1991 is analysed, and its strong points and some of its problems are highlighted; this Argentine programme is described as a regression to a monetary model rather like the old Gold Standard, in which the dollar occupies the place of a "sacred relic". Finally, the consequences of the very marked revaluation of the Argentine currency are analysed, and some characteristics of economic cycles typical of exchange-rate-based stabilization programmes are examined, together with the difficulties standing in the way of the application in Brazil of a programme like that of Argentina.

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Resumen
The purpose of this paper is to contribute to the debate on stabilization policies in conditions of high inflation in the light of the experience of Brazil and some other countries, especially the European monetary crises of the 1920s and the stabilization of the Argentine currency in 1991/1992. The paper begins with some comments on certain special features of situations of high inflation, with emphasis on the unfeasibility of following the sequence of measures recommended for dealing with only moderate imbalances. It goes on to criticise some aspects of the economic policy adopted in Brazil in 1991/1992, demonstrating this policy's inability to break out of a vicious circle in which monetary instability and fiscal imbalances mutually aggravate each other. It is asserted that in certain circumstances stabilization can lead to regression to a more primitive type of monetary system, namely the abandonment of pure flat money based exclusively on authorization and sanction by the State. The anti-inflation policy applied in Argentina since April 1991 is analysed, and its strong points and some of its problems are highlighted; this Argentine programme is described as a regression to a monetary model rather like the old Gold Standard, in which the dollar occupies the place of a "sacred relic". Finally, the consequences of the very marked revaluation of the Argentine currency are analysed, and some characteristics of economic cycles typical of exchange-rate-based stabilization programmes are examined, together with the difficulties standing in the way of the application in Brazil of a programme like that of Argentina.
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