‘Currency Board’ a Misnomer for Argentine System

This article originally appeared in The Financial Times on June 17, 2003.
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Sir, Jeffrey Frankel (“A crude peg for the Iraqi dinar”, June 13) solemnly intones the Economics Establishment Creed: “Argentina’s currency board collapsed … because the straitjacket was so rigid” and because “Argentine exports suffered a huge loss in competitiveness”.

The term “currency board” applied to Argentina’s convertibility system is a misnomer. A currency board cannot neutralise changes in international reserves by expanding or contracting domestic credit. But Argentina’s central bank did just that in virtually every month of convertibility’s existence (April 1991 to December 2001). During convertibility’s life span, 59 per cent of changes in net international reserves were neutralised by contrary adjustments to domestic credit. These adjustments were especially pronounced in 2001: the central bank outdid itself by responding to a $12bn loss of international reserves by compensating with a 122 per cent offset in domestic credit. Indeed, the Argentine central bank intervened in this manner with such aplomb that from 1994 to 2001 its domestic credit position was over six times more volatile than Chile’s central bank, which plainly has an independent monetary policy and has had a floating exchange rate since 1999. Argentina’s central bankers were not sitting bound in a straitjacket, but rather bouncing off the walls of a large padded cell.

Prof Frankel’s assertion about Argentina’s uncompetitiveness fails to pass the smell test, too. Argentine exports increased in every full year during convertibility except 1999, when Brazil, its largest trading partner, suffered a currency crisis. Even in the first 11 months of 2001, when Argentina was in the grip of a full‐​blown crisis, exports were 3.2 per cent ahead of exports during the same period in 2000, outpacing a comparable real growth rate for world trade of 0.9 per cent.

It’s time for the economics establishment to trade stylised facts for facts and stop maligning currency boards by pointing an accusatory finger at Argentina’s convertibility system. A misrepresentation of Argentina’s system and unfounded assertions about straitjackets and uncompetitive exports might be politically correct, but they are not factually correct.