Devaluation in Argentina
Applying one of the theoretical frameworks on human nature, analyse the decision of the government of Argentina when it finally decided, in January 2002, to devalue its national currency, previously pegged to the US dollar. Newspapers reported that:
“The Argentine peso lost about 42 percent of its value today, the first day in 11 years it was allowed to float freely on currency markets, as thousands of rioters vandalized banks and destroyed ATMs [….] Argentina is attempting to control the devaluation through a new two-tier exchange rate system, which has failed in other countries that have tried it. The official exchange rate for imports and exports is 1.40 pesos to the dollar. The free market rate will be used by the public. The peso fell quickly after trading began. At one point it cost as much as 1.8 pesos to buy $1. The peso closed at about 1.6 to 1.7, a devaluation of about 42 percent. The government has expressed hopes that the peso would level off at around 1.6 to the dollar”
(Faiola, Anthony, “Argentina’s Peso Is Freed to Float, And Quickly Sinks”, Washington Post, January 12, 2002, p. A14.).
The government established a low fixed rate seemingly to protect some interest groups. It also delayed the opening of the exchange market for several days and the full floating of the peso for several weeks. Because of both reasons it sent two bad news. The asymmetric value function (Prospect Theory) would advise free floating from the start, combining and concentrating the bad news.
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