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Uruguay Monetary and Exchange-Rate Policy
http://www.photius.com/countries/uruguay/economy/uruguay_economy_monetary_and_exchang~1717.html
Sources: The Library of Congress Country Studies; CIA World Factbook
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    The Sanguinetti administration turned to Uruguay's formerly strong export sector in devising its strategy for renewed economic growth. Through a combination of exchange-rate policy, liberal credit to exporters, and cultivation of new markets, the government hoped to revitalize the traditional export sector (primarily beef and wool) and promote the manufacture of nontraditional exports such as apparel.

    The most important policy tool was the exchange rate. Initially, the government planned to allow the peso to float freely, in keeping with its philosophy of minimal market intervention. In practice, however, the monetary authorities carried out a "dirty float," repeatedly entering the currency market to lower the exchange rate of the peso. Devaluation translated into increased competitiveness. For a small country like Uruguay, facing given world (United States dollar) prices for goods, a devaluation of the peso (more pesos per dollar) meant that an exporter would receive more pesos for a given quantity of goods. This effectively raised the profitability of exports (leaving aside other effects) and encouraged the growth of the sector.

    Exports and GDP both increased after 1985, partly as a result of the more competitive exchange rate. But the policy also had inflationary effects that counteracted the government's restrained fiscal policy. The government's intervention in the currency market consisted of buying foreign exchange and selling pesos. This raised the supply of pesos and lowered their price relative to other currencies (the exchange rate). But the intervention also increased the foreign-exchange component of the money supply, thus fueling inflation. The government attempted to compensate for this increase in the monetary base by decreasing other components of the money supply, a policy known as sterilization. However, an increasing share of Uruguayan bank deposits were denominated in United States dollars rather than pesos. Thus, the efforts to restrict the peso monetary base had little effect on the overall money supply, which continued to increase. As a result, the government could not fine-tune its export-promotion strategy to eliminate inflationary effects. Inflation persisted despite the decline of the public-sector deficit. In short, the government's notable accomplishments on the fiscal side were largely negated on the monetary side.

    Data as of December 1990


    NOTE: The information regarding Uruguay on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Uruguay Monetary and Exchange-Rate Policy information contained here. All suggestions for corrections of any errors about Uruguay Monetary and Exchange-Rate Policy should be addressed to the Library of Congress and the CIA.

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Revised 09-Nov-04
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