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

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  • Augusto de la Torre

    ()

  • Eduardo Levy Yeyati

    ()

  • Sergio L. Schmukler

    ()

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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Article provided by LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION in its journal JOURNAL OF LACEA ECONOMIA.

Volume (Year): (2003)
Issue (Month): ()
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Handle: RePEc:col:000425:008684

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Keywords: "Exchange rate regime; currency board; dollarization; floating; currency crisis; banking crisis; convertibility ";

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  12. De la Torre, Augusto & Levy Yeyati, Eduardo & Schmukler, Sergio L., 2002. "Financial globalization : unequal blessings," Policy Research Working Paper Series, The World Bank 2903, The World Bank.
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  14. Ilan Goldfajn & Gino Olivares, 2001. "Full Dollarization: The Case of Panama," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
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