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Living and Dying with Hard Pegs: The Rise and Fall of Argentina´s Currency Board

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Eduardo Levy Yeyati
Augusto de la Torre
Sergio Schmukler

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Abstract

The rise and fall of Argentina’s currency board illustrates the extent to which the advantages of hard pegs have been overstated. The currency board did provide nominal stability and boosted financial intermediation, at the cost of endogenous financial dollarization, but did not foster fiscal or monetary discipline. The failure to adequately address the currency-growth-debt trap, into which Argentina fell at the end of the 1990s, precipitated a run on the currency and the banks, followed by the abandonment of the currency board and a sovereign debt default. The crisis can be best interpreted as a bad outcome of a high-stakes strategy to overcome a weak currency problem. To increase the credibility of the hard peg, the government raised its exit costs, which deepened the crisis once exit could no longer be avoided. But some alternative exit strategies would have been less destructive than the one adopted.

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Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number catorce.

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Length: 58 pages
Date of creation: 01 Jan 2003
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Handle: RePEc:udt:wpbsdt:catorce

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  1. Frankel, Jeffrey A. & Fajnzylber, Eduardo & Schmukler, Sergio L. & Serven, Luis, 2001. "Verifying exchange rate regimes," Journal of Development Economics, Elsevier, vol. 66(2), pages 351-386, December. [Downloadable!] (restricted)
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  2. Assaf Razin & Efraim Sadka, 2001. "Country Risk and Capital Flow Reversals," NBER Working Papers 8171, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc. [Downloadable!]
  4. Roberto Chang & Andrés Velasco, 2000. "Liquidity Crises in Emerging Markets: Theory and Policy," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 11-78 National Bureau of Economic Research, Inc. [Downloadable!]
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  5. Tornell, Aaron & Velasco, Andres, 2000. "Fixed versus flexible exchange rates: Which provides more fiscal discipline?," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 399-436, April. [Downloadable!] (restricted)
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  6. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2003. "Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons," NBER Working Papers 9828, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Charles Enoch & Tomás J. T. Baliño, 1997. "Currency Board Arrangements: Issues and Experiences," IMF Occasional Papers 151, International Monetary Fund.
  8. De la Torre, Augusto & Levy Yeyati, Eduardo & Schmukler, Sergio L., 2002. "Financial globalization : unequal blessings," Policy Research Working Paper Series 2903, The World Bank. [Downloadable!]
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  9. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk under currency boards," Journal of Development Economics, Elsevier, vol. 69(2), pages 367-391, December. [Downloadable!] (restricted)
  11. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March. [Downloadable!] (restricted)
  12. Maria Soledad Martinez Peria, 2001. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Journal of Finance, American Finance Association, vol. 56(3), pages 1029-1051, 06. [Downloadable!] (restricted)
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