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Living and Dying with Hard Pegs: The Rise and Fall of Argentina´s Currency Board

  • Eduardo Levy Yeyati
  • Augusto de la Torre
  • Sergio Schmukler

The rise and fall of Argentina’s currency board illustrates 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 fiscal or monetary 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 Universidad Torcuato Di Tella in its series Business School Working Papers with number catorce.

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Length: 58 pages
Date of creation: 01 Jan 2003
Date of revision:
Handle: RePEc:udt:wpbsdt:catorce
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  1. 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.
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