# **1. Introduction: Argentina’s dual exchange rate regime**

_The current section motivates the study of Argentina’s equilibrium exchange rate. It presents the country context and Argentina’s de-facto dual exchange rate regime._ A de-facto dual exchange rate regime emerged in Argentina when, faced with a shortage of dollars in 2011, the government introduced a series of capital controls. Formal and informal currency restrictions were put in place to limit capital flight and exchange rate depreciation and protect reserve levels. The government effectively controlled the formal exchange rate by limiting the amount of foreign currency that Argentines could legally purchase for imports, travel, and savings.<sup>2</sup> This situation lasted until December 2015, when the government lifted controls and allowed the exchange rate to depreciate.

While the controls were in place, the lack of convertibility of the currency led to the emergence of various parallel exchange rates, which authorities had little control over. Moreover, concerns about the sustainability of this policy and speculation over eventual devaluation, mirrored in widening spreads of parallel rates, triggered a run to U.S. dollars in parallel markets. Two widely used rates, which became reference points for pricing transactions in the economy, were the blue dollar rate–based on tracking average stock prices of eight major companies quoted on both the Argentine and US exchanges–and the blue chip swap rate–the implied rate derived when businesses were buying dollar-denominated bonds or shares in pesos and then selling them on international stock exchanges for dollars. Argentines could purchase US dollars onshore at the blue rate and receive dollars in an offshore account at the blue chip swap rate.

<!-- Start of picture text --> Figure 1: Evolution of the official vs. blue and blue chip swap rates<br>Argentine Peso (US$/Peso) Argentine Peso (US$/Peso)<br>0.4 60 0.25<br>Spread (%) - right scale Official rate<br>Official rateBlue rate 50 0.20 Blue rate<br>0.3 Blue chip swap<br>40<br>0.15<br>30<br>0.2<br>20 0.10<br>0.1 10 0.05<br>0<br>0.00<br>0.0 -10<br>Source: dolarblue.net Source: dolarblue.net and ambito.com<br>Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan-2013 Apr-2013 Jul-2013 Oct-2013 Jan-2014 Apr-2014 Jul-2014 Oct-2014 Jan-2015 Apr-2015 Jul-2015 Oct-2015 Jan-2016<br><!-- End of picture text --> The existence of multiple exchange rates led to distortions and costs that raised concerns over allocative efficiency. Importers who could not access US dollars at the official exchange rate, and instead resorted to the illegal market, were at a clear disadvantage unrelated to productivity. Moreover, exchange rate spreads created arbitrage opportunities that resulted in the widespread selling of dollars in the informal 2 Importers are required to obtain government authorization before purchasing U.S. dollars. The central bank must approve dividend and profit remittances overseas, which have been subject to delays. Foreigncurrency purchases for Argentines traveling abroad require an extensive list of documents, foreign purchases are subject to credit card taxes, and online spending has become limited. Government quotas for Argentines seeking to purchase dollars for savings have been limited and this transaction became virtually banned in mid-2012. All in all, these restrictions have made it very difficult for Argentine citizens to obtain dollars to save or invest abroad.

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