Is the peso overvalued? A technical note

ARGENTINA - Report 18 Feb 2025 by Joaquin Cottani

In this report, I argue that, contrary to what President Milei and members of his economic team say, the Argentine peso is overvalued. By how much—I don't know, nor do I think anyone does. I know that the peso is overvalued for three reasons. First, because of the cepo: if it didn't exist, the nominal exchange rate would be higher. Second, because of the output gap: even if real GDP grew 5-6% this year, it would still be negative at the end of the year. Third, because of the current account deficit: last year, the current account was roughly balanced because of the recession; this year, it will be in deficit because of, among other factors, the economic recovery. Together, these conditions create the ideal scenario for a devaluation to be effective to stabilize the macroeconomy.

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