On original and mortal sins
Critics of the Caputo Plan of December 2023 would have preferred that the myriad exchange controls that constitute the so-called "cepo cambiario" (hereinafter, "cepo") had been eliminated at the start of the plan or shortly thereafter. According to them, the failure to do so by the government is the reason why Argentina is now facing external problems epitomized by a seemingly overvalued peso (atraso cambiario) and a low and still net-negative level of foreign reserves. They see this as the plan’s original sin.
Government officials and defenders of the plan, on the other hand, beg to disagree. For them, having eliminated the cepo when the plan was launched would have caused the nominal exchange rate (NER) to stampede and inflation to be out of control for several months, while doing it at any other time in 2024 would have prevented inflation from falling monotonically, which was instrumental in reducing inflationary expectations.
To assess whether the government or its critics are right, I simulated what would have happened to inflation and the real exchange rate (RER) had the government fully eliminated the cepo from the outset, namely, in December 2023. I conclude that, for the most part, the government was right in doing what it did. However, this does not imply that keeping the cepo for much longer is a good thing. To prove this, I also simulated how inflation, the RER, and foreign reserves would react to a full elimination of the cepo in November 2025, assuming this were to happen.
Not having eliminated the cepo cambiario from the beginning or shortly thereafter was not Plan Caputo's original sin. However, not eliminating it now, or as soon as politically possible, could be its mortal sin.
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