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Lessons From Argentina’s Currency Board System For Indonesia

Author

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  • Agus Fadjar Setiawan

    (Bank Indonesia)

Abstract

The purpose of this study is to attempt to draw lessons from Argentina’s Currency Board System (CBS) for Indonesia. Moreover, this study redownloads Argentina’s economic performance before and after the implementation of the CBS, through an examination of some macroeconomic indicators namely real GDP growth, interest rates, money and inflation, as well as fiscal condition. The first three indicators are compared to the US, as the reserve-currency country, and Indonesia. The last indicator is compared to Indonesia only. In summary, the study found that after the adoption of the CBS the economic growth of Argentina substantially improved. The real interest rate tended to converge with the US interest rate, and the inflation rate that is linked to money growth was brought down to a low level close to the US inflation rate. However, this study also produced some more important findings. First, the long-run sustainability of Argentina’s economic growth with its CBS is questionable. Second, the real interest rate convergence was broken due to high default risk and deflationary expectations in Argentina. Third, low inflation later on turned to deflation as a consequence of the overvalued nominal exchange rate. Fourth, lack of sound fiscal policy and weak fiscal performance undermined the CBS regime. Finally, the study suggests that the absence of a lender of last resort is an institutional weakness of the CBS.

Suggested Citation

  • Agus Fadjar Setiawan, 2002. "Lessons From Argentina’s Currency Board System For Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 5(3), pages 122-157, December.
    • Handle: RePEc:idn:journl:v:5:y:2002:i:3e:p:122-157
    DOI: https://doi.org/10.21098/bemp.v5i3.315
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    References listed on IDEAS

    as
    1. Mr. Charles Enoch & Mr. Tomás J. T. Baliño, 1997. "Currency Board Arrangements: Issues and Experiences," IMF Occasional Papers 1997/005, International Monetary Fund.
    2. John Williamson, 1995. "What Role of Currency Boards?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa40, January.
    3. Feldstein, Martin, 2002. "Argentina's Fall: Lessons from the Latest Financial Crisis," Scholarly Articles 2959849, Harvard University Department of Economics.
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