The document discusses the crisis of the Argentine peso between January 2002 and January 2003. During this period, the peso transitioned from a fixed exchange rate to a floating rate. By January 2003, inflation in Argentina had reached 20% while US inflation was only 2.2%, yet the peso had depreciated to Ps3.20/$ compared to the Ps1/$ fixed rate previously. If purchasing power parity held, the exchange rate should have been Ps1.17/$. The actual 63.3% undervaluation of the peso was likely due to both high inflation and Argentina's severe balance of payments crisis during this period.
The document discusses the crisis of the Argentine peso between January 2002 and January 2003. During this period, the peso transitioned from a fixed exchange rate to a floating rate. By January 2003, inflation in Argentina had reached 20% while US inflation was only 2.2%, yet the peso had depreciated to Ps3.20/$ compared to the Ps1/$ fixed rate previously. If purchasing power parity held, the exchange rate should have been Ps1.17/$. The actual 63.3% undervaluation of the peso was likely due to both high inflation and Argentina's severe balance of payments crisis during this period.
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The document discusses the crisis of the Argentine peso between January 2002 and January 2003. During this period, the peso transitioned from a fixed exchange rate to a floating rate. By January 2003, inflation in Argentina had reached 20% while US inflation was only 2.2%, yet the peso had depreciated to Ps3.20/$ compared to the Ps1/$ fixed rate previously. If purchasing power parity held, the exchange rate should have been Ps1.17/$. The actual 63.3% undervaluation of the peso was likely due to both high inflation and Argentina's severe balance of payments crisis during this period.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as XLS, PDF, TXT or read online from Scribd
The Argentine peso was fixed through a currency board at Ps1.00/$ throughout the 1990s. In January 2002 the Argentine peso was floated. On January 29, 2003 it was trading at Ps3.20/$. During that one year period Argentina's inflation rate was 20% on an annualized basis. Inflation in the United States during that same period was 2.2% annualized. a. What should have been the exchange rate in January 2003 if PPP held? b. By what percentage was the Argentine peso undervalued on an annualized basis? c. What were the probable causes of undervaluation? Assumptions Spot exchange rate, fixed peg, early January 2002 (Ps/$) Spot exchange rate, January 29, 2003 (Ps/$) US inflation for year (per annum) Argentine inflation for year (per annum) a. What should have been the exchange rate in January 2003 if PPP held? Beginning spot rate (Ps/$) Argentine inflation US inflation PPP exchange rate b. By what percentage was the Argentine peso undervalued on an annulized basis? Actual exchange rate (Ps/$) PPP exchange rate (Ps/$) Percentage overvaluation (positive) or undervaluation (negative) c. What were the probable causes of undervaluation? The rapid decline in the value of the Argentine peso was a result of not only inflation, but also a severe crisis in the balance of payments (see Chapter 4). 3.20 1.17 -63.307% 1.00 20.00% 2.20% 1.17 Value 1.0000 3.2000 2.20% 20.00%