If Argentina had employed an orthodox currency board regime, monetary policy would have been abandoned and Dr Lachman’s assertion would be true. An orthodox currency board’s balance sheet contains no domestic assets (or, if domestic assets are on the balance sheet, they are “frozen”).
Accordingly, base money in this type of monetary set-up moves in a one-to-one correspondence with changes in a board’s foreign reserves, not because of changes in monetary policy and resulting changes in its net domestic asset position.
My study (“On Dollarisation and Currency Boards: Error and Deception”, The Journal of Policy Reform, 2002) of the central bank’s balance sheets during the period of convertibility shows that Argentina did not abandon domestic monetary policy. Indeed, the balance sheets contained substantial domestic assets, which fluctuated wildly, particularly after 1995. Argentina’s mix of a hyperactive monetary policy and a pegged exchange rate proved deadly.
Steve H. Hanke,
Professor of Applied Economics,
The Johns Hopkins University,
Baltimore, MD 21218, US