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

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

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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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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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Frankel, Jeffrey A. & Fajnzylber, Eduardo & Schmukler, Sergio L. & Serven, Luis, 2001. "Verifying exchange rate regimes," Journal of Development Economics, Elsevier, vol. 66(2), pages 351-386, December. [Downloadable!] (restricted)
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  2. Assaf Razin & Efraim Sadka, 2001. "Country Risk and Capital Flow Reversals," NBER Working Papers 8171, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Tornell, Aaron & Velasco, Andres, 2000. "Fixed versus flexible exchange rates: Which provides more fiscal discipline?," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 399-436, April. [Downloadable!] (restricted)
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  4. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2003. "Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons," NBER Working Papers 9828, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Roberto Chang & Andres Velasco, 1999. "Liquidity crises in emerging markets: Theory and policy," Working Paper 99-15, Federal Reserve Bank of Atlanta. [Downloadable!]
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  6. Charles Enoch & Tomás J. T. Baliño, 1997. "Currency Board Arrangements: Issues and Experiences," IMF Occasional Papers 151, International Monetary Fund.
  7. De la Torre, Augusto & Levy Yeyati, Eduardo & Schmukler, Sergio L., 2002. "Financial globalization : unequal blessings," Policy Research Working Paper Series 2903, The World Bank. [Downloadable!]
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  8. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk under currency boards," Journal of Development Economics, Elsevier, vol. 69(2), pages 367-391, December. [Downloadable!] (restricted)
  10. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March. [Downloadable!] (restricted)
  11. Maria Soledad Martinez Peria, 2001. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Journal of Finance, American Finance Association, vol. 56(3), pages 1029-1051, 06. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Eduardo Levy Yeyati & Maria Soledad Martinez Peria & Sergio Schmukler, 2004. "Market Discipline under Systemic Risk: Evidence from Bank Runs in Emerging Economies," Business School Working Papers systemicrisk, Universidad Torcuato Di Tella. [Downloadable!]
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  2. Panigo, Demian & Torija-Zane, Edgardo, 2004. "Une approche régulationnniste des crises de l'économie Argentine : 1930-2002," CEPREMAP Working Papers (Couverture Orange) 0407, CEPREMAP. [Downloadable!]
  3. Eduardo Levy Yeyati, 2006. "Liquidity Insurance in a Financially Dollarized Economy," Business School Working Papers liquid, Universidad Torcuato Di Tella. [Downloadable!]
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  4. Tito Cordella & Eduardo Levy Yeyati, 2004. "Country Insurance," IMF Working Papers 04/148, International Monetary Fund. [Downloadable!]
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  5. Nogues, Julio J. & Baracat, Elias, 2005. "Political economy of antidumping and safeguards in Argentina," Policy Research Working Paper Series 3587, The World Bank. [Downloadable!]
  6. Claessens, Stijn & Klingebiel, Daniela & Schmukler, Sergio, 2003. "Government Bonds in Domestic and Foreign Currency: The Role of Macroeconomic and Institutional Factors," CEPR Discussion Papers 3789, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Perry, Guillermo & Serven, Luis, 2003. "The anatomy of a multiple crisis : why was Argentina special and what can we learn from it?," Policy Research Working Paper Series 3081, The World Bank. [Downloadable!]
  8. de la Torre, Augusto & Schmukler & Sergio L., 2004. "Coping with risk through mismatches : domestic and international financial contracts for emerging economies," Policy Research Working Paper Series 3212, The World Bank. [Downloadable!]
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  9. David McKenzie & Ernesto Schargrodsky, 2005. "Buying Less, But Shopping More: Changes In Consumption Patterns During A Crisis," Business School Working Papers buyinglessshop, Universidad Torcuato Di Tella. [Downloadable!]
  10. Oliver Grimm, 2007. "Fiscal Discipline and Stability under Currency Board Systems," Economics working paper series 07/66, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
  11. Eduardo Levy Yeyati, 2006. "Exchange Rate Regimes in the 2000s: A Latin American Perspective," Business School Working Papers exchangerate, Universidad Torcuato Di Tella. [Downloadable!]
  12. Masahiro Kawai & Richard Newfarmer & Sergio L. Schmukler, 2003. "Financial Crises: Nine Lessons From East Asia," Finance Working Papers 482, East Asian Bureau of Economic Research. [Downloadable!]
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  13. Baracat, Elias & nogues, Julio J., 2005. "WTO safeguards and trade liberalization: lessons from the Argentine footwear case," Policy Research Working Paper Series 3614, The World Bank. [Downloadable!]
  14. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2003. "The price of inconvertible deposits - the stock market boom during the Argentine crisis," Policy Research Working Paper Series 3146, The World Bank. [Downloadable!]
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  15. Marina Halac & Sergio Schmukler, 2003. "Distributional effects of crises : the role of financial transfers," Policy Research Working Paper Series 3173, The World Bank. [Downloadable!]
  16. Kathryn M.E. Dominguez & Linda L. Tesar, 2005. "International Borrowing and Macroeconomic Performance in Argentina," NBER Working Papers 11353, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Eduardo Levy-Yeyati, . "Financial Dollarization and Debt Deflation Under a Currency Board: The Case of Argentina," DCBSLA Series 3, Inter-American Development Bank, Research Department. [Downloadable!]
  18. Eduardo Levy Yeyati & Maria Soledad Martinez Peria & Sergio Schmukler, 2004. "Market Discipline in Emerging Economies: Beyond Bank Fundamentals," Business School Working Papers marketdiscipline, Universidad Torcuato Di Tella. [Downloadable!]
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