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Argentina, the currency board and first signs of recession?

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"We are bankrupt, we are ruined" Argentine President Duhalde announced on January 4, 2002, two days before passing the emergency economic legislation that removed the peso-dollar parity and introduced a dual exchange rate.

This puts an end to a decade old currency board adopted option at the end of the hyperinflation of 1989-1990 after two failed attempts to stabilize the single peso. The Convertibility Law, initiated by Cavallo in April 1991, imposed three rules strictly regulating the activity of the currency board:

The exchange rate was absolutely fixed against the dollar ($ 1 = 1 peso), the currency was made freely convertible; the obligation to provide for any additional issue of pesos with the equivalent of dollars was raised.

While the full dollarization (as determined in Ecuador in 1999) makes it extremely difficult to turn around, the system of Dual Currency Argentine Currency Board (pesos and dollars are used in parallel in the country) is supposed to be reversible, allowing a return to a more active monetary policy after a stabilization phase.

However, as Jerome Sgard noted, this experience seems to have been defended in Argentina as a "permanent commitment", and not as an intermediate phase of monetary stabilization and institutional reconstruction.

Tags: Argentina bankruptcy, Argentinian emergency economic legislation, dollar - peso exchange rate

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