Distorting the Micro to Embellish the Macro: The Case of Argentina
Author(s): Cavallo, Domingo; Cottani, Joaquin
In this extremely timely paper, Cavallo and Cottani discuss the fallibility of Argentina’s “New Economic Paradigm” and the reasons for its longevity. The authors address the use of real exchange rate targeting (RERT), a mix of policies to manage the real exchange rate (RER) at a low level that aims to promote exports and reduce the vulnerability of the economy to future crises, and the extent to which this has been effective. The authors analyze whether Argentina has succeeded in this drive to deliver a stable low real exchange rate or whether, to the contrary, the policies required to keep the RER down significantly distort other aspects of the micro-economy to an extent that it is not a sensible option.