In exchange affairs, at the communications level, the Minister of Economy or the head of the central bank of a country has two options: silence or explain the current system. Luis Caputo chose the second alternative.
The Minister of Economy defended the current floating exchange rate system within a range, with regard to the “whatever happens” floating scheme, for three reasons: the volatility of demand for the peso: the fact that few operations can significantly adjust the exchange rate (instead of a small or large market, I like to talk about a smaller or larger market), and the impact of politics on expectations.
It’s clear what we’re talking about, or rather, what we’re not talking about. We are not talking about abandoning fiscal balance and its connection to increasing the money supply for financial reasons. In fact, the current increase in demand for the peso by the private sector is prompting the Treasury and the Central Bank to issue the local currency by purchasing dollars. A lucky decision, because if – God forbid – the demand for the peso decreases tomorrow, the public sector can sell the dollars it just bought again, whereas if it responds to the increased demand for the peso by increasing public spending, it will be very difficult for it to do the opposite.
Of the three reasons that explain the ministerial preference, as a result of the strength of the midterm elections on October 26, the third reason was moderate. The first two remain. In the eyes of those with public responsibilities in exchange affairs, a temporary loss of reserves is better than a temporary rise in the price of the dollar (think of the covers of the next day’s newspapers and the transmission of fluctuations in the price of the dollar on radio and television, as if it were a football match).
never…? Sometimes everything! They teach experience and history. Rudi Dornbusch said that in economic models a distinction is made between temporary and permanent adjustments, while in practice the relevant distinction is between very temporary adjustments and non-temporary adjustments. So, for decision making, “at some point…”, is not the here and now question. What is noteworthy is that the determination of the economic team in matters of exchange is clear, and they have a way to support it.
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