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Argentina, Mexico, and currency boards: another case of rules versus discretion

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  • Carlos E. Zarazaga

Abstract

This article discusses currency boards in light of the recent economic experiences of Mexico and Argentina. Carlos Zarazaga argues that currency boards do not solve the important time inconsistency problem pointed out in the rules-versus-discretion literature. Because of this failure, even the quasi-currency board established by law (the so-called convertibility law) did not protect Argentina from one of its most severe financial crises in modern times. ; In addition, there is the normative issue of whether an ironclad rule such as a currency board rule is superior to a noncontingent one. Zarazaga argues that is not the case, except perhaps when the distinction between these two kinds of rules has become blurred in countries with poor reputations for following policy commitments. In such circumstances, ironclad rules theoretically might be desirable, although this conjecture has yet to be proved formally and verified empirically. Zarazaga argues that the study of the recent economic experiences of Mexico and Argentina could be useful for addressing both issues.

Suggested Citation

  • Carlos E. Zarazaga, 1995. "Argentina, Mexico, and currency boards: another case of rules versus discretion," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 14-24.
  • Handle: RePEc:fip:fedder:y:1995:i:qiv:p:14-24
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    File URL: http://www.dallasfed.org/assets/documents/research/er/1995/er9504b.pdf
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    References listed on IDEAS

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    1. Kamin, Steven B. & Rogers, John H., 1996. "Monetary policy in the end-game to exchange-rate based stabilizations: the case of Mexico," Journal of International Economics, Elsevier, vol. 41(3-4), pages 285-307, November.
    2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    3. V. V. Chari, 1988. "Time consistency and optimal policy design," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 17-31.
    4. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
    5. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    6. Herbert E. Taylor, 1985. "Time inconsistency: a potential problem for policymakers," Business Review, Federal Reserve Bank of Philadelphia, issue Mar/Apr, pages 3-12.
    7. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 91-116.
    8. Carlo Cottarelli, 1993. "Limiting Central Bank Credit to the Government; Theory and Practice," IMF Occasional Papers 110, International Monetary Fund.
    9. Schwartz, Anna J., 1993. "Currency boards: their past, present, and possible future role," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 147-187, December.
    10. Owen F. Humpage & Jean M. McIntire, 1995. "An introduction to currency boards," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-11.
    11. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Richard W. Kopcke, 1999. "Currency boards: once and future monetary regimes?," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 21-37.
    2. Ying Wu, 2005. "Determining a Modified Currency Board's Two-Period Exchange Rate Strategy," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 11(4), pages 347-357, November.
    3. Joseph A. Whitt, 1996. "The Mexican peso crisis," Economic Review, Federal Reserve Bank of Atlanta, issue Jan, pages 1-20.
    4. repec:kap:iaecre:v:11:y:2005:i:4:p:347-357 is not listed on IDEAS
    5. Marco A. Espinosa-Vega & Steven Russell, 1996. "The Mexican economic crisis: alternative views," Economic Review, Federal Reserve Bank of Atlanta, issue Jan, pages 21-44.
    6. Ferro, Gustavo, 2001. "Currency Board: From Stabilization to Full Dollarization? The Argentine Experience," MPRA Paper 15353, University Library of Munich, Germany.
    7. Wu, Ying, 2005. "A modified currency board system: Theory and evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(4), pages 353-367, October.
    8. Haubrich, Joseph G. & Ritter, Joseph A., 2004. "Committing and reneging: A dynamic model of policy regimes," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 1-18.
    9. William C. Gruben & Jahyeong Koo & Robert R. Moore, 1999. "When does financial liberalization make banks risky? : an empirical examination of Argentina, Canada and Mexico," Center for Latin America Working Papers 0399, Federal Reserve Bank of Dallas.
    10. Ferro, Gustavo, 2001. "De bancos centrales, juntas monetarias y dolarizaciĆ³n
      [On central banks, currency boards and dollarization]
      ," MPRA Paper 15354, University Library of Munich, Germany.

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    Keywords

    Currency boards ; Argentina ; Mexico ; Money;

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