A central bank with spunk!

Leading up to 40% interest rate

Last year Congress passed a law changing the tax code which included a new tax on Central Bank debt held by non residents. The new tax became effective on April 25th. The new tax initiated a sell off by non residents which was absorbed by the CB which sold USD 2.1 billon between April 23rd and 25th without the dollar moving one cent (20.25 ARS/USD). The new tax coincided with the increase of the 10 year US treasuries yield and the strengthening of the dollar. The CB thought this was an external shock and that no further actions were going to be needed.

Groundhog day in Argentina
By: John Cochrane – Stanford University

A moving inflation target

In 2018 Argentina’s central bank raised its inflation target from 8-12 percent to 15 percent: annual wage negotiations had exceeded inflation targets by 15% in 2017.
Argentina’s Unseen Fragility
By: Martin Guzman – Columbia University

Déjà vu

Emilio Ocampo studied the 10 most recent stabilization plans that Argentina went through and concluded:

i) in the medium term gradualism did not work (however, it is also true that in the long run shock policies didn’t work either), ii) successful plans always included significant monetary and fiscal adjustment, iii) wage and price controls are not necessary nor sufficient to reduce inflation or to ease the cost of adjustment, iv) orthodox plans were more effective than hybrid or heterodox plans in reducing inflation, v) contrary to conventional wisdom over time successful plans delivered significantly higher growth in GDP and real wages and improved the distribution of income for workers (same can be said about orthodox plans versus heterodox ones), vi) with respect to the external environment, low US interest rates did not seem to have a significant impact on success, whereas failure was always associated with declining terms of trade

Fighting Inflation in Argentina: A Brief History of Ten Stabilization Plans
Author: Emilio Ocampo
From: UCEMA/NYU Stern