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Monetary Unions and Hard PegsEffects on Trade, Financial Development, and Stability$
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Volbert Alexander, George M. von Furstenberg, and Jacques Mélitz

Print publication date: 2004

Print ISBN-13: 9780199271405

Published to Oxford Scholarship Online: August 2004

DOI: 10.1093/0199271402.001.0001

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

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

Chapter:
(p.183) 11 Living and Dying with Hard Pegs: The Rise and Fall of Argentina's Currency Board
Source:
Monetary Unions and Hard Pegs
Author(s):

Augusto de la Torre

Eduardo Levy Yeyati

Sergio L. Schmukler

Publisher:
Oxford University Press
DOI:10.1093/0199271402.003.0011

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 not promote fiscal or monetary discipline, and fostered nominal stability and financial intermediation only at the cost of endogenous financial dollarization. Ultimately the failure adequately toaddress the currency-growth-debt trap, into which Argentina had fallen at the end of the 1990s, precipitated a run on the currency and on the banks, triggering a currency collapse and a sovereign debt default. The crisis, rooted in the underlying weaknesses of Argentina’s monetary regime, can best be 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.

Keywords:   Argentine crisis, bank run, currency board, debt trap, sovereign debt default, exchange rate systems, exit strategies, financial dollarization

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