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

Abstract

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 not promote fiscal or monetary discipline, and fostered nominal stability and financial intermediation only at the cost of endogenous financial dollarization. Ultimately the failure adequately toaddress the currency-growth-debt trap, into which Argentina had fallen at the end of the 1990s, precipitated a run on the currency and on the banks, triggering a currency collapse and a sovereign debt default. The crisis, rooted in the underlying weaknesses of Argentina’s monetary regime, can best be 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.