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Argentina's Currency Crisis


             A currency board combines three elements: an exchange rate that is fixed to an "anchor currency," automatic convertibility (that is, the right backed by the central bank to exchange domestic currency at this fixed rate whenever desired), and a long-term commitment to the system, which is often set out directly in the central bank law. .
             In Argentina's case, the currency board was set up to stabilize the financial situation of the country, fix the inflation rate (to that of the US) and thus control the rampant inflation rate and to avoid potential pressure from investors to break a peg to their advantage.
             Economic credibility, low inflation and lower interest rates were obvious attractions of a currency board for Argentina. However, currency boards may prove limiting, especially for countries with weak banking systems or prone to economic shocks, both of which are scenarios that as we will see, affected Argentina in the late 1990s. .
             With a currency board, the country is unable to use monetary financial policies, such as adjustments of domestic interest or currency devaluations, to stimulate the economy. With the peg of the peso to the U.S. dollar, Argentina's monetary policy was in effect, set by the U.S. Federal Reserve. As a result, divergence between the economic cycle in the US and Argentina would have resulted in an inappropriate monetary policy affecting Argentina. As a result, the only tools for economic adjustment for Argentina to counteract these effects (whenever necessary) was fiscal policy.
             An additional problem of the central board was that the central bank can no longer be an unlimited lender of last resort to banks in financial trouble (as its first priority is to maintaining the currency link) .
             ARGENTINA 1990 - 1997.
             President Carlos Menem tried to implement a modern economic regime following his appointment in 1989. Menem opened trade by economic deregulation, lowered the customs duty, liberalized trade, privatized the state-owned firm, canceled investment restrictions, and increased the capital influx from overseas.


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