Central Banking in Financially Subordinated Countries During Crises: The Central Bank of the Argentine Republic’s Response to the Pandemic in 2020

Central banks in financially subordinated countries face structural limits derived from the position of the currencies that they issue in the international monetary hierarchy. These constraints become particularly acute during crises when financially subordinated countries face capital outflows triggered by both foreign and domestic residents. In crises, peripheral central bank intervention is characterized by the selling of international reserves. Issuing national currency can add fuel to the outflow fire, as shown by the response to the pandemic of the Central Bank of the Argentine Republic (BCRA). The BCRA implemented several countercyclical measures, including financing fiscal policies, lowering interest rates, increasing the liquidity of the financial system, targeted policies to boost lending, and FX market intervention. These were quantitatively significant and relatively successful at the beginning. However, from August, a growing exchange rate pressure and an acceleration of inflation forced the BCRA to change its strategy to face the outflow and withdraw national currency from circulation. The BCRA implemented exchange controls, reduced the financing to the Treasury, issued remunerated liabilities, and increased interest rates without being able to avoid a greater devaluation of the currency or reduce inflation.