CONJECTURES ON WHY A DEVALUATION DID NOT CURE ARGENTINA

Resumen

Many experts, policymakers, and journalists had been enthusiastically advising Argentina toabandon the currency board arrangement that had been In place since 1991, on the grounds thatit was choking Its economy. They were disappointed when Argentina’s attempt to devalue “just alittle” ended up in a collapse of its currency and real GDP. We argue that the reason why the devaluation“drug” didn’t cure Argentina is because the doctors who recommended it overlookedthat the perfect information conditions required for the medication to work properly were not metby that country. We propose an alternative “diagnosis,” according to which the attempt to devalue"just a little” ends up in higher depreciation and inflation rates than originally intended. Thisprediction, consistent with the evidence for Argentina, suggests that non-state contingent(“rigid” ,) monetary regimes, such as a currency board or outright dollarization, might dominate ina welfare sense, by virtue of a transparency-inducing feature, state-contingent (“flexible” ) policiesin countries like Argentina, where economic agents are unable to satisfactorily monitor the policymakers’actions, as well as the underlying decision process.