In practice economical balance is unachievable. Stabilization conditions that many scholars and economists claim are but fleeting status of the economy. Some of the major crises around the world including the US stock market collapse, Asian financial crisis, Latin financial crisis and recently the Argentinean banking crisis are examples the statement. Theories in economics indicate that the result of such financial collapse stem from several factors. Any one factor can affect the other such as the determination of nominal exchange rate (NER) or the real exchange rate (RER); production possibility frontier and its impact on external balance of payments; overvaluation of goods in the factor markets; and current account destabilization etc (Li 2005). Any kind of instability in these factors as a result of government policies can have a catalytic effect on the economy.
[...] These views only indicate that as the Convertibility Plan begun to pick speed on the road of recovery policies and political strife intervened to bring it down resulting in a setback for the economy. The transition from an orthodox economy had not been that difficult despite the fixed currency exchange rate, debt crisis and strict government policies based on fiscal policies. Instead Argentine had almost achieved its desired status despite several after math of international shocks had it not been for the government's ultimate decision to eliminate the Convertibility Plan. [...]
[...] In doing so, it has demonstrated that it is feasible for a country to relinquish control over its monetary policy." (Velde and Veracierto 2000)[5]. References Artana, Daniel. La Economia Durante el Plan de Convertibilidad", mimeo, Fundacion de Investigaciones Economicas Latinoamericanas, March 2001. Burdisso et al. The Argentine Banking and Exchange Rate Crisis of 2001: Can We Learn Something New from Financial Crises? Classification Number JEL: C33, E51, July 2002. Hanke, Steve H. Statement of Professor Steve Hanke on Argentina's Current Political-Economic Crisis. Professor of Applied Economics, The Johns Hopkins University, March Hanke, S. H. and Schuler, K. A Dollarization Blueprint for Argentina. [...]
[...] However, the only flaw at this time had been the "failure to converge with the world inflation" (Burdisso et al, 2002) due to which there had been an "appreciation of the exchange rate. This and the output boom led to the deficit in trade accounts". From 1994 to 1996 Argentina experienced crucial financial developments. Due to the increase in the world interest rates and the Mexican peso crisis, the real experienced a reduced capital inflows and created domestic financial crisis whereby the banks were forced to close due to under performance and high credits. [...]
[...] This decision however did not come about with such appeal as Argentina had already dollarized unofficially before and the dollar deposits in banks exceeded the peso deposits, loans can be made in dollars and it was also legal to use dollars alongside the peso making it. The dollarization therefore did not have a "good impression on the country's assets, liabilities and prices for dollar conversions” (Hanke and Schuler 1999). According to Hanke and Schuler (1999) the Convertibility Law that established the system introduced a provision that Argentine be pegged to the Australes and dollar, and allowing Central Bank to control the percent of reserves of any form of currency or materials. [...]
[...] Friedberg's Commodity and Currency Comments Experts' Report,” February Kiguel, M. Structural Reforms in Argentina: Success or Failure? Comparative Economic Studies. Publication Year: 2002. Page Number: 83+ Li, Carmen. Exchange Rate Policy and Balance of Payment Crisis Velde, F. R. and Veracierto, M. Dollarization in Argentina. Economic Perspectives. Volume: 24. Issue: 1. Publication Year: 2000. [...]
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