The Central Bank of Argentina (BCRA) was established in 1935. The bank received a new charter in 2012, which expanded its previous mandate of ensuring the stability of the financial and monetary system to include the goal of making sure that the countrys resources are employed entirely to achieve social equity and economic development. The action was motivated by the recognition that credit is a crucial element that influences economic growth. Consequently, the change in BCRAs responsibilities gave it the ability to ensure that the financial system is at the center of the countrys economic growth by making credit available at reasonable terms to companies of every size in all areas for their activities and investments.
The Federal Reserve is the United States central bank, which was created by Congress in 1913 with the aim of providing a safer, more stable, and more flexible financial and monetary system. The BCRA and the Fed have similar roles as they are responsible for their respective countries monetary policies through the management of credit and money conditions. Also, the central banks supervise and regulate banking and other financial institutions with the aim of ensuring a sound financial system and protecting consumer rights. The role goes hand in hand with the control of systemic risks that may occur in their financial markets. Both banks provide some financial services to their governments and global institutions in fulfilling their role of supervising their national payment systems. The European Central Bank (ECB) is responsible for the monetary policy of the euro area. Also, the regional central bank supervises credit institutions in member states in its efforts to have a sound and stable banking and financial system (ECB, 2016). Therefore, it collaborates with national central banks to accomplish similar tasks as the BCRA.
The monetary policy refers to the actions that a central bank or an equivalent institution utilizes to influence the rate and size of growth of money supply, which affect interest rates. Maintenance of the monetary policy requires actions such as modification of the interest rate, purchase and sale of government bonds, and changes in the bank reserves or the money that banks should keep in their vaults. A central bank may utilize an expansionary or a contractionary monetary policy. A contractionary approach seeks to slow the growth rate of money supply to control inflation and may slow down economic growth, raise unemployment, and reduce borrowing and consumer expenditure. An expansionary approach increases money supply to reduce unemployment, increase borrowing and consumer spending, and boost economic growth.
The BCRA has taken a passive approach to its monetary policy. The central bank has abandoned the use of a nominal anchor by allowing monetary policy to follow the demand for money. These efforts aim at monetary expansion through accommodating movements in private-sector borrowing, price expectations, exchange rate policy, and the funding gap in treasury. The BCRA perceives that inflation has been driven by external shocks, supply power, and oligopoly power; thus, it has determined that utilizing a monetary base or interest rates would be ineffective as it would result in a reduction of output. The government has identified and targeted price levels, the velocity of circulation, and economic activity as the factors to control inflation, an effort that has been successful in the calming of short-term inflation. Efforts to lower inflation have focused on striking a credible equilibrium through the control of wages, non-tradeable good prices, the exchange rate, and imported good prices.
A countrys currency exchange rate is a crucial factor that influences the economic status of the public. It represents the value of a countrys money for global trade and finance. Consequently, central banks have a responsibility to appropriate policies on foreign exchange as they are their countries monetary authorities. Foreign exchange policies influence the mobilization of foreign capital and savings to expand investment and close the resource gap in the domestic market. It is important to note the unique place that central banks have in foreign exchange markets as they do not have a profit motive in their involvement.
Frenkel, states that the BCRA controls the currency market through purchasing foreign currency with the aim of accumulating foreign reserves and maintaining a particular exchange rate. The central bank utilizes a fully sterilized intervention to ensure that it does not lose control of the short-term interest rate or the money supply. The purchase of dollars by the BCRA leads to a growth of the monetary base, which may result in a reduction of the interest rate. However, it compensates for the increase by absorbing the additional liquidity, which results from the intervention; thus, fail to affect the interest rate.
In 2012, the central bank introduced foreign exchange restrictions aimed at protecting its declining foreign reserves and prevention of capital flight. The efforts have been largely successful leading to a rise in reserves. However, the BCRAs chief pointed out that these restrictions are a long-term measure as the bank aims at avoiding pro-cyclical capital. Also, the country seeks to avoid cases where it has to manipulate reserve levels by issuing debt or devaluing its currency. The BCRA implements foreign exchange interventions after it determines the needs of the economy, financial issues, and imports and investments.
A central bank should ensure that it has a solid balance sheet to enhance its capacity to produce accurate statistics to guide policy-making. The 2008 global financial crisis did not have a destabilizing effect on Argentinas financial and monetary system. Consequently, BCRAs balance sheet did not experience any adverse effects as there was insignificant flight of deposits, no credit collapse, no forced closure of financial institutions, no broken contracts, and no extreme devaluation. The central bank had adopted a risk management approach, which ensured good performance. It was based on controlled floating exchange rates, liquidity buffers for foreign and domestic currency, a convergence of monetary demand and supply due to commitment to certain quarterly targets, and a reduction to risk exposure through supervision and regulation of the countrys financial system.
The system was resistant to the shocks that emanated from the crisis, and the BCRA was able to utilize foreign exchange operations to respond to depreciating pressures. For instance, financial lending only declined by 4.5percent in the last quarter of 2008 and quickly recovered in the initial three months of 2009. Conversely, the bank maintained a high liquidity level rising by 7 percent above the figures observed before the crisis (Bank for International Settlements, n.d.). Conversely, the Fed had to take various actions related to its balance sheet, which included an extension of discount window loans, reduction of the interest rate, and special credit and liquidity programs.
Immediately after the inauguration of the countrys new president in December 2015, he moved to eliminate currency controls. However, the BCRA has been forced to make several interventions to slow down the decline of its currency as the new governments currency flotation and devaluation efforts have made the Argentine peso the worst performing currency among the major emerging countries. A 16 percent decline in its value led the central bank into selling $119 million to strengthen the currency market. The banks actions have been motivated by inflationary pressure. However, the BCRA should execute more interventions such as devaluation of consumer prices, and raising auction rates to prevent excess pesos from chasing dollars.