Mr. Redrado, governor of the Central Bank of Argentina, repeats a great monetary canard. The third item in his eight-point critique states: “as opposed to what happened in the 1990s when money supply was determined by capital flows, sterilization is currently used as a mechanism to meet the targets to coincide with the local demand for pesos.”
From April 1991 until early January 2002, the Central Bank was governed, in part, by the Convertibility Law. Contrary to Mr. Redrado’s assertion, the Central Bank engaged in very active sterilization during this period. Accordingly, the bank was not operating as a currency board.
After a thorough examination of the Central Bank’s balance sheets, I determined that the bank sterilized changes in its foreign reserves in virtually every month of the convertibility system’s existence. As I reported in “On Dollarization and Currency Boards: Error and Deception,” The Journal of Policy Reform, 2002, 59% of the changes in foreign reserves were sterilized, on average, during the April 1991- December 2001 period.
Due to the Central Bank’s hyperactive monetary policies during the convertibility period, the money supply (base money) was not solely determined by changes in the bank’s foreign reserves, as would be the case under a currency board regime. In fact, only 41% (on average) of the changes in the bank’s foreign reserves resulted in changes in the money supply.
If the governor of the Central Bank of Argentina cannot correctly characterize the bank’s past, we are left to question the accuracy of his claims about its current operations.
Steve H. Hanke
Professor of Applied Economics
Johns Hopkins University