Introduction to Monetary Policy – Federal Funds Rate, the Fed, Loanable Funds Theory
According to Morgan Stanley, inflation is set to rise to 45% for Venezuela in 2010. This is after President Chavez cut the value of the Venezuelan currency by 50% months before the country’s reelections. Depreciating Venezuela’s currency will boost the socialist state’s revenues, while spurring price instability. Already, prices soared 25% in 2009.
Chavez said in an unprecedented speech that the bolivar would have two levels, a rate of 2.6 per dollar for food and health essentials and a 4.3 petro-dollar rate for everything else. This depreciation could affect Chavez’s ratings amongst the country’s 28 million residents if it sparks political tensions. The impact of this devaluation will severely impact Venezuela’s trade partners, especially Colombia.
Venezuela also devalued its currency in 2005 from 1,920 bolivars to 2,150 bolivars per dollar. In 2006, inflation climbed to 103%. However, in 2008, it re-denominated the currency, ignoring the three zeros at the end of it!
In the short term, the value may help the country pay of its near term debts by increasing the revenues generated by oil exports.