Monday, March 21, 2005

What if Venezuela spends all its petrodollars?

Chavez is seeking to limit the amount of reserves that the central bank can hold, which on the surface doesn't seem to be a huge issue, given that countries that let their currencies float shouldn't accumulate reserves. But then again, Venezuela's exchange rate doesn't float, and the central bank intervenes in the foreign exchange market, so dollars do tend to accumulate on its balance sheet.

Chavez wants to use those dollars to build infrastructure and housing for the poor, which sounds like a laudable goal. But what is likely to happen in real life? Reserves will be spent, aggregate demand will increase, and Venezuela will either run a big trade deficit (which means that it will be forced to run a surplus in the future) or otherwise there will be inflation or shortages of goods in sectors where there is not enough installed capacity to meet demand.

In the end, it's all awash...

Chavez seeks access to surplus reserves

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