currency boards

Doug Henwood dhenwood at panix.com
Tue Jul 20 11:32:50 PDT 1999


Oh yes, the present crisis in Argentina, with its much touted currency board (i.e., effective dollarization), is a good negative example of the relationship between a currency's value and national productivity levels. Argentine industry is just no match for the U.S., but it's adopted the U.S. currency as its standard. The effect of this is to make Argentine products progressively more expensive on world markets. Without the dollar peg, the Argentine peso would sink in value if it were freely traded. With the dollar peg, the country doesn't have the outlet of devaluation, so it's got a nasty recession instead. And because the Argentine central bank can't lower rates and pump liquidity, it's powerless to fight the recession.

As someone put it at a recent IMF forum, Argentina looked to the currency board as an attempt to buy "credibility in a bottle." That's appropriate in a world where everyone seems to think that finance comes first and the real sector is an afterthought. But things don't work that way.

Doug



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