This week, Argentina released its February inflation statistics. Inflation spiked, again. Indeed, the official annual inflation rate jumped to It jacked up interest rates in an attempt to keep the peso from plunging and generating more inflation. As they often do, the IMF Doctors have prescribed the wrong medicine.
To hold the managed pegged peso exchange rate, which is a fatally flawed exchange rate regime with no credibility, the BCRA has to impose sky-high interest rates. With these rates, the economy will collapse, and the peso will eventually follow. When I reflect on the peso, there are plenty of additional lessons. It was an unusual name for an unusual system. The Convertibility System was not a currency board. Rather, it was a currency-board-like system: a mixture of currency board and central banking features.
As early as October , while writing in the Wall Street Journal, I predicted that Convertibility would eventually behave more like a typical central bank, and that it would be engulfed in a currency crisis. Well, that sad day arrived in And, eventually, the Convertibility System, in which the peso was linked to the U. Many people asserted that the crux of the Argentine crisis was an overvalued peso.
Does the story withstand scrutiny? A classic sign of uncompetitiveness caused by an overvalued currency is declining exports. Exports during the first 11 months of were about 3. Considering that estimated real growth in world trade was only 0. Indeed, the export sector was one of the few bright spots in the Argentine economy. If the rest of the economy had been growing as fast as the export sector during , Argentina would not have been swallowed by a recession.
In an attempt to bolster claims of a peso overvaluation, some observers asserted, on the basis of taxi rides from the airport or other casual impressions, that prices were high in Buenos Aires, and that high prices were evidence the peso was significantly overvalued against the dollar.
