Why inflation can contribute to depreciation of bolívares

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Reference no: EM133495860

Scenario 1.

Venezuela faced continuous hyperinflation since 2012. Despite efforts to enforce capital controls, the pegged value of the Venezuelan Bolívares (VEF) to the USD was unstable. On 22 December 2012, 1 VEF was equivalent to 0.23286 USD, while on 2 June 2023, 1 VEF was valued at 0.0000003804 USD.

Scenario 2.

In May 2023, the U.S. Federal Reserve raised interest rates for a consecutive 10th hike by 0.25% to 5.25%, hinting at a potential pause in further increases. This move allows officials to evaluate the consequences of recent bank failures, wait for a resolution to the uncertainty over the debt ceiling standoff, and monitor inflation trends.

Questions:

1. Discuss why inflation can contribute to the depreciation of the Bolívares. Evaluate the benefits and costs of the pegged foreign exchange policy for Venezuela.

2. Explain potential movements of the USD for the short run and the long run.

Reference no: EM133495860

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