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Living and dying with hard pegs : the rise and fall of Argentina's currency board

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  • De la Torre, Augusto
  • Levy Yeyati, Eduardo
  • Schmukler, Sergio L.

Abstract

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.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2980.

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Date of creation: 31 Mar 2003
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Handle: RePEc:wbk:wbrwps:2980

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Keywords: Economic Theory&Research; Banks&Banking Reform; Fiscal&Monetary Policy; Payment Systems&Infrastructure; Financial Intermediation; Banks&Banking Reform; Fiscal&Monetary Policy; Financial Intermediation; Financial Economics; Economic Theory&Research;

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  1. Aaron Tornell & Andres Velasco, 1995. "Fixed versus Flexible Exchange Rates: Which Provides More Fiscal Discipline?," NBER Working Papers 5108, National Bureau of Economic Research, Inc.
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  15. María Soledad Martínez-Peria & Sergio Schmukler, 2002. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 5, pages 143-174 Central Bank of Chile.
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