Political shocks, international reserves and the real exchange rate—The Argentine case

Exogenous shocks to international reserves are introduced as an indicator for exchange rate adjustments. These reserves shocks are identified for Argentina in the 1970s, and they appear to have been induced by political upheavals as well as by changes in the external terms of trade. Granger and modified Sims causality tests indicate that the shocks to reserves did lead the real exchange rate. From the seemingly erratic series of mini and maxi devaluations, a rule of crawling/galloping peg is estimated, with the reserves shocks as significant independent variables that affected the pace of devaluations. The crawling peg, used as an instrument to pursue an international reserves target, was the channel through which changes in the political and economic environment of the country were transmitted to fluctuations of its real exchange rate.