Endogenous money and public foreign debt during the Argentinean Convertibility

Abstract

This paper tries to demonstrate that the endogeneity of money in the Argentinean currency board, known as Convertibility, was compatible with the heterodox endogenous money approach. The Argentinean Convertibility was interpreted by the conventional view as a pure case of the Mundell–Fleming model with fixed exchange rate (MFFER). This approach points out that domestic money became ‘endogenous’ because the central bank loses the ability to determine the monetary policy. However, this last endogenity process has nothing to do with the heterodox endogenous money approach. While the MFFER endogeneity is ‘supply-led’ (balance of payment effect), the heterodox approach is ‘demand-led’ (bank credit effect). So, given the structural external constraint (not only due to the historical Argentinean balance of payments constraint, but also increased by the need for backing the monetary base with foreign reserves) the Central Bank of Argentina operated as a lender of last resort to an unsustainable expansion of public foreign indebtedness. The dollar credit rationing to the government was the limit to the central bank's accommodation policy.