Krugman Argentina and the dollar

Argentina has never fully dollarized. But in 1991 it tried to tame inflation with a law that was supposed to establish a permanent exchange rate of one peso for one dollar, a commitment backed by a “currency board” that was advertised as holding a dollar in reserves for every peso in circulation. 

The truth was that pesos were never 100 percent dollar-backed, but this incomplete backing wasn’t the reason the system collapsed. 

The problem, instead, was that having eliminated the possibility of using monetary policy to boost the economy when necessary, Argentina found itself stuck in a prolonged, grueling recession. 

Also, the currency board didn’t solve the nation’s persistent problem of budget deficits.

 Yet when the dollar went up and down, for reasons that had nothing to do with Argentina, Argentina’s currency followed its fluctuations. There was a big run-up in the value of the dollar during the late 1990s, probably reflecting optimism over the technology boom of the time

And Argentina, having pegged itself to the dollar, found its currency rising in value on world markets, making its exports increasingly uncompetitive and deepening its recession. And of course abandoning the peso entirely for dollars would have the same problem

Paul Krugman NYT 12 December2023

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