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

  • Carlos E. Zarazaga

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.

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File URL: http://www.dallasfed.org/assets/documents/research/er/1995/er9504b.pdf
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Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1995)
Issue (Month): Q IV ()
Pages: 14-24

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Handle: RePEc:fip:fedder:y:1995:i:qiv:p:14-24
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  1. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-Fulfilling Debt Crises," Levine's Working Paper Archive 114, David K. Levine.
  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. Steven B. Kamin & John H. Rogers, 1996. "Monetary policy in the end-game to exchange-rate based stabilizations: the case of Mexico," International Finance Discussion Papers 540, Board of Governors of the Federal Reserve System (U.S.).
  4. Herb Taylor, 1985. "Time inconsistency: a potential problem for policymakers," Business Review, Federal Reserve Bank of Philadelphia, issue Mar/Apr, pages 3-12.
  5. Carlo Cottarelli, 1993. "Limiting Central Bank Credit to the Government; Theory and Practice," IMF Occasional Papers 110, International Monetary Fund.
  6. 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 473-91, June.
  7. 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.
  8. Guillermo A. Calvo & Enrique G. Mendoza, 1996. "Mexico's balance-of-payments crisis: a chronicle of death foretold," International Finance Discussion Papers 545, Board of Governors of the Federal Reserve System (U.S.).
  9. V.V. Chari, 1988. "Time consistency and optimal policy design," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 17-31.
  10. 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.
  11. 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.
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