After a long flight from Chile, I'm back in Quisqueya!
My my, its incredible all the rumors and negative attitudes towards the economic situation in the DR has mushroomed on DR1 during the time I was gone!
Let me explain a bit of economics here, because its obvious many people don't know enough to realize that the appreciation of the Peso is actually GOOD!
As you read the following, keep in mind that in the short run prices are considered STICKY, because they don't move as they should in ANY CAPITALISTIC ECONOMY IN THE WORLD IN ECONOMIC SHOCKS!
In the long run, prices are flexible and can respond to changes in supply and demand. In the short run, many prices are "sticky" at some predetermined level.
To see how the short run and the long run differ, consider the effects of a change in monetary policy. Suppose the Central Bank suddenly reduced the money supply by 5 percent. In the long run, a 5 percent reduction in the money supply lowers all prices (including nominal wages) by 5 percent whereas all real variables remain the same. Thus, in the long run, changes in the money supply do not cause fluctuations in output or employment.
In the short run, however, many prices do not respond to changes in monetary policy. A reduction in the money supply does not immediately cause all firms to cut the wages they pay, all stores to change the price tags on their goods, all mail-order firms to issue new catalogs, and all restaurants to print new menus. Instead, there is little immediate change in many prices; that is, many prices are sticky. The short-run price stickiness implies that the short-run impact of a change in money supply is not the same as the long-run impact.
The failure of prices to adjust quickly and completely means that, in the short run, output and employment must do some of the adjusting instead. In other words, during the time horizon over which prices are sticky, the classical dichotomy no longer holds: nominal variables can influence real variables, and the economy can deviate from the equilibrium predicted by the classical model.
To further explain how contractionary monetary policy affects the economy, take the United States in the 1870s, as an example.
Before the American civil war, the United States was on a gold standard. Paper dollars were readily convertible into gold. Under this policy, the quantity of gold determined the money supply and the price level.
In 1862 (I think it was that year), after the civil war broke out, the US treasury announced that it would no longer redeem dollars for gold. In essence, this act replaced the gold standard with a system of fiat money. Over the next few years, the government printed large quatities of paper currency (called greenbacks for their color) and used the seigniorage (printing money without backing) to finance wartime expenditure. Because of this increase in the money supply, the price level approximately doubled during the war.
When the war was over, much political debate centered on the question of whether to return to the gold standard. The Greenback party was formed with the primary goal of maintaining the system of fiat money (that is what most money is today, fiat- meaning that its legal tender just because the government says so). Eventually, however, the Greenback party lost the debate. Policymakers decided to retire the greenbacks over time in order to reinstate the gold standard at the rate of exchange between dollars and gold that had prevailed before the war. Their goal was to return the value of the dollar to its former level. (Notice a connection between 1800s USA and Current Leonel's policy - with some noticeable differences of course).
Returning to the gold standard this way required reversing the wartime rise in prices, which meant aggregate demand had to fall. (To be more precise, the growth in aggregate demand needed to fall short of the growth in the natural rate of output). As the price level fell, the economy experienced a recession from 1873 to 1879. By 1879, the price level was back to its level before the war, and the gold standard was reinstated.
Lets go back to the DR now.
A lower exchange rate and sticky prices will increase the unemployment level, temporarily. As unemployment rises, demand for the goods/services drops and the price levels will drop a bit to reflect the drop in demand. As prices drop, demand will increase because people will have more real income at hand. An increase in demand would cause output (or production) to increase to meet demand. The higher production requires more labor, and thus increases employment - reducing the unemployment rate. The newly employed (those who became unemployed before) will be hired at a pay that has already caught up to the new price levels, thus causing the average person to be better off economically.
Notice, we are seeing this effect right now. Things are going for the better, most of you guys need to learn to see things in long term perspective and you need to read an economics book prior to making false gloomy predictions about how you think a strong peso would be bad for society, when in fact the opposite is true.
And for whoever called me a "shill" let me make it clear that I DO NOT WORK FOR THE GOVERNMENT, nor do I receive a cent from them either.
In this world, there is no such thing as something for nothing. In the end, everybody gets exactly what they paid for and rebounding our economy back into the trajectory of prosperity will not come for free! But in the end, the current costs will be worth it!
My my, its incredible all the rumors and negative attitudes towards the economic situation in the DR has mushroomed on DR1 during the time I was gone!
Let me explain a bit of economics here, because its obvious many people don't know enough to realize that the appreciation of the Peso is actually GOOD!
As you read the following, keep in mind that in the short run prices are considered STICKY, because they don't move as they should in ANY CAPITALISTIC ECONOMY IN THE WORLD IN ECONOMIC SHOCKS!
In the long run, prices are flexible and can respond to changes in supply and demand. In the short run, many prices are "sticky" at some predetermined level.
To see how the short run and the long run differ, consider the effects of a change in monetary policy. Suppose the Central Bank suddenly reduced the money supply by 5 percent. In the long run, a 5 percent reduction in the money supply lowers all prices (including nominal wages) by 5 percent whereas all real variables remain the same. Thus, in the long run, changes in the money supply do not cause fluctuations in output or employment.
In the short run, however, many prices do not respond to changes in monetary policy. A reduction in the money supply does not immediately cause all firms to cut the wages they pay, all stores to change the price tags on their goods, all mail-order firms to issue new catalogs, and all restaurants to print new menus. Instead, there is little immediate change in many prices; that is, many prices are sticky. The short-run price stickiness implies that the short-run impact of a change in money supply is not the same as the long-run impact.
The failure of prices to adjust quickly and completely means that, in the short run, output and employment must do some of the adjusting instead. In other words, during the time horizon over which prices are sticky, the classical dichotomy no longer holds: nominal variables can influence real variables, and the economy can deviate from the equilibrium predicted by the classical model.
To further explain how contractionary monetary policy affects the economy, take the United States in the 1870s, as an example.
Before the American civil war, the United States was on a gold standard. Paper dollars were readily convertible into gold. Under this policy, the quantity of gold determined the money supply and the price level.
In 1862 (I think it was that year), after the civil war broke out, the US treasury announced that it would no longer redeem dollars for gold. In essence, this act replaced the gold standard with a system of fiat money. Over the next few years, the government printed large quatities of paper currency (called greenbacks for their color) and used the seigniorage (printing money without backing) to finance wartime expenditure. Because of this increase in the money supply, the price level approximately doubled during the war.
When the war was over, much political debate centered on the question of whether to return to the gold standard. The Greenback party was formed with the primary goal of maintaining the system of fiat money (that is what most money is today, fiat- meaning that its legal tender just because the government says so). Eventually, however, the Greenback party lost the debate. Policymakers decided to retire the greenbacks over time in order to reinstate the gold standard at the rate of exchange between dollars and gold that had prevailed before the war. Their goal was to return the value of the dollar to its former level. (Notice a connection between 1800s USA and Current Leonel's policy - with some noticeable differences of course).
Returning to the gold standard this way required reversing the wartime rise in prices, which meant aggregate demand had to fall. (To be more precise, the growth in aggregate demand needed to fall short of the growth in the natural rate of output). As the price level fell, the economy experienced a recession from 1873 to 1879. By 1879, the price level was back to its level before the war, and the gold standard was reinstated.
Lets go back to the DR now.
A lower exchange rate and sticky prices will increase the unemployment level, temporarily. As unemployment rises, demand for the goods/services drops and the price levels will drop a bit to reflect the drop in demand. As prices drop, demand will increase because people will have more real income at hand. An increase in demand would cause output (or production) to increase to meet demand. The higher production requires more labor, and thus increases employment - reducing the unemployment rate. The newly employed (those who became unemployed before) will be hired at a pay that has already caught up to the new price levels, thus causing the average person to be better off economically.
Notice, we are seeing this effect right now. Things are going for the better, most of you guys need to learn to see things in long term perspective and you need to read an economics book prior to making false gloomy predictions about how you think a strong peso would be bad for society, when in fact the opposite is true.
And for whoever called me a "shill" let me make it clear that I DO NOT WORK FOR THE GOVERNMENT, nor do I receive a cent from them either.
In this world, there is no such thing as something for nothing. In the end, everybody gets exactly what they paid for and rebounding our economy back into the trajectory of prosperity will not come for free! But in the end, the current costs will be worth it!