Contractionary or expansionary devaluations in Argentina and Brazil

This work discusses the impacts Argentina’s devaluation of the Peso in 2002 and whether its economic growth during the last decade was due to the switch of the exchange rate system. Following the real devaluation, the economic contraction of Argentina gained momentum. However, in the medium-term the country registered high growth rates, and positive effects of devaluations were achieved. The growth was also triggered by a favourable international environment and unrepeatable features of the local economy. The outcomes in the long-term were not positive due to the impossibility to overcome the constraints imposed by the underdeveloped production structure. This paper has employed a combination of three research strategies: an intensive literature review of the different channels in which exchange rate changes cause output expansion or contraction; an econometric analysis of Argentina’s trade elasticities; and a key informant interview with relevant policymakers. In addition, this research has included a comparison with Brazil to show how internal and external factors can influence the outcome of a real devaluation.