Note of the Month - January 2013

Argentina from Menem's stabilisation to the 2002 devaluation

Argentina illustrates the effects of an anti-inflationary policy based excessively on a policy of fixed exchange rates and a peg with a much stronger foreign currency. Argentina moved from hyperinflation (a rate of 5.000% in 1989) to normality under President Carlos Menem. His apparently successful policy of stabilization was based on a one to one exchange rate with the US dollar, illustrated here by the picture of an electoral leaflet looking like a banknote. The strains of an overvalued currency, growing government debt and the contagion effects from other financial crises, were followed, however, by the collapse of the economy in 2001-2. Local authorities tried for a time to overcome the squeeze in their finances produced by the crisis by printing their own form of subsidiary money. The "Patacon" of the Province of Buenos Aires (literally "Letter of the Treasury to cancel debts") was used to pay civil servants' wages. The Patacon became the most important of the various temporary parallel currencies issued during the emergency. It did not stop the crisis, but survived for some time the 2002 devaluation of the peso and sovereign default, making monetary policy a little less restrictive.

Luca Einaudi, Centre for History and Economic