Econ Paper On Tequila Crisis

The Tequila effect on Argentina

The Tequila crisis in Mexico in 1994 did not ripe stay and enjoy its power of destruction in Mexico. It be the way to get to other Latin American countries and accordingly along the way stumb guide on another desirable dupe: Argentina. Argentina became the target of the crisis and as a result, its economy had to suffer. The gold board that it used successfully before turned out to have a counter effect this time and in fact helped the crisis bring the economy down. The question is how this all happened? In this paper, I leave alone elaborate on how the crisis along with the gold board brought on the vicious circle of credit crush that paralyzed the whole banking system and how the credit crunch led the unpolished to recession.
The currency board allowed Argentina to maintain a fair amount of U.S Dollars in militia ready to be exchanged for pesos at any time. Every peso in circulation was anchored to a dollar in reserves. This practice helped ensure that no supply of one currency was more than the other and therefore guarded the pesos value against U.S Dollars. However, according to Krugman, the rig would not always work: But what would happen when the public, rationally or not, began to change large numbers of pesos into dollars?



The answer was that the countrys banks moved quickly to the edge of collapse and menace to bring the rest of the economy down with them. (Krugman Paul 49) This authority happens when people fear that the pesos value is falling against the U.S Dollars. In addition, to avoid further losses from any forthcoming depreciation, people convert all their money into U.S Dollars. In this case, a withdrawal from abroad will ace to a dearth of pesos in the banks reserves. Because of this shortage, the bank must augur in a loan. The company who has to repay this loan will withdraw pesos from another bank. This withdrawal will then lead to a shortage of pesos in that banks reserves and therefore requires it...If you want to get a full essay, order it on our website: Orderessay



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