Since the devaluation jump that took place on December 13 last year, and which brought the wholesale exchange rate from 366 pesos per dollar to 800 pesos per dollar, the government decided to implement a scheme of progressive and controlled increases on the currency (wrongly called Crawling Peg), of 2% per month.
As a result, the discussion by economists and analysts, in general, about the possible exchange rate backwardness has grown exponentially. In order to contribute to the heated debate, we analyze whether it is correct to talk about the existence of an exchange rate backwardness and the evolution of the exchange rate in the last 20 years.
First of all, the question must be asked: What do they mean when they talk about an exchange rate backwardness? Although the answer seems simple, or even taken for granted by some, it must be understood that economic analysis is carried out by means of models, which are a simplified representation of reality. In which the analyst decides which variables he considers relevant to include and which to omit, what is the functional form that gives rise to the relationship between these variables, etc. For this reason, there can be as many different models as there are variables considered in an economy.
Thus, for example, the term 'exchange rate arrears' could be used as the official undervaluation of the US currency in the context of a model of maximization of BCRA reserves or in a model of partial equilibrium with respect to foreign trade of a given good/service.
Despite the possible diversity and lack of precision in the use of this term, we consider that most analysts refer to the small relative increase of the wholesale exchange rate with respect to the price level, in the context of an equilibrium model in the foreign exchange market.
In other words, in general, they refer to the fact that the official dollar has evolved below the price level, which has led to a fall in exports (due to a fall in the profit margin) and an increase in imports (due to the substitution effect), negatively impacting the country's trade balance and, consequently, the level of reserves, until the inevitable corrective devaluation.
This observation could be valid, since inflation in the last five months has indeed been well above 2% per month. However, when turning to the macroeconomic fundamentals that would allow us to induce whether the exchange rate is at an artificially low level, one finds that key indicators show otherwise: both BCRA reserves and the balance of trade balance for the first four months of the year have shown a remarkable improvement. Reserves increased by more than USD 7 billion, while the trade balance has been in consecutive surplus.
These two variables allow us to affirm, following the national government's line of thought, that the exchange rate is not below the equilibrium level (a level impossible to determine), since if it were, we should be observing a loss of reserves as a result of the BCRA's desire to keep the exchange rate stable and the trade balance should be in deficit, as it was during 90% of the year 2023.
The surplus trade balance can be interpreted in different ways, if we do it from the point of view of the income-absorption scheme, it would indicate that domestic demand is not enough to empty domestic production and the positive balance results from such surplus. If we do it from the saving-investment scheme, we would be facing a scenario where domestic saving exceeds investment in a proportion equal to the surplus trade balance and with an excess of saving the interest rate should fall causing an outflow of capital. It is clear that from both points of view the current situation is not congruent with an artificial exchange rate lag.
In spite of agreeing with the national government on this, one must recognize that the scenario could be totally different in the short-medium term, and thus it could be eloquent to speak of a potential backwardation of the official exchange rate.
The current exchange and trade restrictions and capital controls should not be disregarded, which in case of being released without sufficient credibility on the national government, could derive in a pressure of demand in the foreign exchange market. In addition, as individuals' purchasing power improves, the demand for imported consumer goods (demand for foreign exchange) will also put upward pressure.
Finally, although Milei labeled as "useless" those who use arithmetic to determine what the correct exchange rate should be, the following graph is provided for the reader to draw his or her own conclusions. It shows the relative price of the official exchange rate during the last 20 years, updated for inflation, with respect to the value of 05/17/2024.

Source: Own elaboration based on BCRA - INDEC.
The interpretation of the graph is very simple: In those years where the bar was above 0%, as in the period 2004-2007, the exchange rate in current terms (adjusted for inflation) was higher than the current dollar rate. When the bar is below, as in the 2008-2014 period, the (current) rate is lower than the current value.
In other words, if we decide to adjust the value of the wholesale exchange rate for inflation to determine the exchange rate lag (or appreciation), the results will be qualitatively and quantitatively different depending on the initial period we choose.
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