The rise and fall of Argentina's currency board shows 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 monetary or fiscal 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.
Details
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Author
De la Torre, Augusto Levy Yeyati, Eduardo Schmuk
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Document Date
2003/03/31
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Document Type
Policy Research Working Paper
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Report Number
WPS2980
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2010/07/01
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Doc Name
Living and dying with hard pegs : the rise and fall of Argentina's currency board
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Keywords
Currency boards; Monetary law; Monetary policy political aspects; Currency devaluation; Currency fluctuation; Currency issuance; Currency repegs; Exchange rate instability; Exchange rate adjustments; Dollar standard; Floating exchange rates; Currency markets; Convertibility; Deposit-refund system; Interest rates; Peso argentino; Demand deposits; Savings; Banking reform
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Citation
De la Torre, Augusto Levy Yeyati, Eduardo Schmuk
Living and dying with hard pegs : the rise and fall of Argentina's currency board (English). Policy, research working paper series ; no. WPS 2980 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/968441468768629523/Living-and-dying-with-hard-pegs-the-rise-and-fall-of-Argentinas-currency-board