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

Economia, Vol. 5, No. 2, pp. 43-99, 2003

Posted: 2 Jul 2004

See all articles by Augusto de la Torre

Augusto de la Torre

Columbia University, School of International & Public Affairs (SIPA), Students

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

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Abstract

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.

Keywords: Exchange rate regime, currency board, dollarization, floating, currency crisis, banking crisis, convertibility

JEL Classification: E44, F30, 31, F33, F36, F41, G21, G28

Suggested Citation

de la Torre, Augusto and Levy-Yeyati, Eduardo Levy and Schmukler, Sergio, Living and Dying with Hard Pegs: The Rise and Fall of Argentina's Currency Board. Economia, Vol. 5, No. 2, pp. 43-99, 2003. Available at SSRN: https://ssrn.com/abstract=560385

Augusto De la Torre

Columbia University, School of International & Public Affairs (SIPA), Students ( email )

420 West 118th Street
New York, NY
United States

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

Sergio Schmukler (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

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