Two years ago, a few days after the victory of Cristina Fernandez de Kirchner in Argentina’s presidential election, the government decided to impose a new system of foreign exchange controls that the press called ‘the cepo.’ Initially started as an effort to crack down on tax evasion, it became clear later that the new measures were part of another exchange-market intervention by the central bank.
In a system of flexible exchange rates, the central bank limits its activities to controlling the money supply. Therefore, the price of foreign currency acts only as an indicator of the correctness or incorrectness of its monetary policy. Under a system of foreign exchange controls, however, the central bank rations foreign currencies by, for example, selling dollars at an arbitrary below-the-market-level price to some specific privileged groups.
In the specific case of the Argentine cepo, the central bank prohibits the purchase of dollars by people who want to save but allows importers or those who travel abroad to buy at the official rate, with strict controls over the amount delivered. In addition, it also sells dollars at official prices to those that use credit cards while abroad, although a tax charged increases the exchange rate by 20 percent.
The government justified imposing the cepo on Argentineans by claiming….To Read More…