The Argentine Banking Panic After The “Tequila” Shock: Did “Convertibility” Help Or Hurt?

Abstract

In April 1991, after forty years of high inflation and two years of hyperinflation, Argentina adopted a monetary regime based on a fixed exchange rate with full convertibility of the domestic currency into American dollars and bimonetarism. Under such a regime the money supply is endogenous and any attempt to issue currency above this endogenous amount will end up in a loss of reserves and a subsequent threat to the convertibility of the domestic currency. This iron corsage was seen at the time as the only type of legal framework that could discipline the social forces that traditionally had put heavy pressures on the government, leading to high fiscal or quasi fiscal deficits and then to inflation.