Should Argentina Adopt the Dollar?

Por Nicolás Cachanosky & William J. Luther Publicado el 11/2/19 en




On the campaign trail, Mauricio Macri vowed to fight inflation. Now, three years into his administration, it looks like that requires more commitment than he and his team of economic advisors envisioned. Argentina ended 2018 with an annual inflation rate of 47.6 percent. That is the highest rate since the early 1990s, when Argentina’s bout with hyperinflation came to an end. With this in mind, some (including John CochraneSteve Hanke, and Mary Anastasia O’Grady) have called for Argentina to abandon the peso in favor of the dollar.

Dollarization became a relevant policy option in Latin America beginning around 2000. Ecuador dollarized in January 2000. El Salvador dollarized in 2001. But Argentina, which had established a currency board in 1991, moved in the opposite direction following its 2001 crisis. On January 6, 2002, it broke its one-for-one peg with the dollar. The results have been disastrous.

The argument for dollarization is relatively straightforward. Argentina has shown itself incapable of managing the money supply appropriately. The annual rate of inflation has averaged an astounding 55 percent since the central bank was founded in 1935. It would do better by outsourcing its monetary policy. Half measures, like adopting a fixed exchange rate or establishing an orthodox currency board, might work elsewhere. But Argentina has in the past broken the promises implicit in those reforms. In order for its commitment to be credible now, it must go all the way. Replacing the peso with the dollar would remove any potential for the central bank to monetize government debts and put pressure on the Treasury to balance its budget. Inflation expectations would plummet. And low and stable inflation would follow.

Straightforward as the reform is, calls for dollarization in Argentina have largely fallen on deaf ears. Some fret about the consequent loss of monetary policy. Some argue that the requisite reforms would make dollarization unnecessary. Those holding such views cling to the possible, while ignoring the probable.

Dollarization and Domestic Monetary Policy

When a country adopts the dollar, it loses the ability to conduct independent monetary policy. It has no control over the supply of dollars in circulation. If the Federal Reserve engages in expansionary monetary policy, dollarized countries get expansionary monetary policy. If the Fed engages in contractionary monetary policy, dollarized countries get contractionary monetary policy. In other words, dollarized countries are stuck with whatever monetary policy the Fed pursues—and there is little reason to think the Fed will take those dollarized countries into account when setting policy.

Those opposed to dollarization see the outsourcing of monetary policy as a cost. They note that a well-functioning central bank might do a better job than the monetary policy imported from abroad. If the demand for money were to increase in Argentina, for example, the domestic central bank could offset the increase in demand with a corresponding increase in supply to prevent a recession. Without a domestic central bank, changes in the demand for money in Argentina are likely to be ignored. Hence, those opposed to dollarization conclude, Argentina would be better off having its own currency managed by a domestic central bank.

There is no denying that dollarization would prevent Argentina from conducting effective monetary policy. But that is hardly a cost if Argentina is unlikely to conduct effective monetary policy anyway. Argentina has not conducted effective monetary policy in the past. And there is little reason to believe it will conduct monetary policy any better in the future. One should not let the perfect be the enemy of the good. The first-best solution, where the central bank carefully manages the supply of pesos, is possible. But it is highly improbable. Therefore, the second-best solution of dollarization is probably the best one can hope for.

Dollarization and the Requisite Institutional Reforms

Dollarization is not a panacea. Argentina faces many problems. Its structural deficit, for example, is out of control. The government spends too much and taxes too little. If Argentina is to prosper going forward, fiscal reform is essential.

But the structural deficit—and corresponding ballooning of outstanding debt—is in large part why peso holders have such high inflation expectations. They worry, quite reasonably, that the central bank will print money to extinguish growing debts, that their deposit balances will be converted to treasury bonds prior to an inevitable default. And, perversely, these high inflation expectations necessitate monetary expansion in order to keep money from becoming too tight. By relieving the underlying pressure responsible for high inflation, those opposed to dollarization claim, the requisite fiscal reforms make dollarization unnecessary.

They are correct, so far as it goes. If the requisite fiscal reform were made, there would be little reason to dollarize. But, once again, one must distinguish the possible from the probable. It is possible that the fiscal authority will submit to the requisite reform despite having access to a central bank that might be called upon to monetize the debt. But the odds of implementing such reforms are much improved when the potential for monetization is removed.

The Case for Dollarization

As noted, dollarization is not a first-best solution. It precludes effective monetary policy. It is unnecessary when a country has its fiscal affairs are in order. For these reasons, dollarization is entirely inappropriate for most countries.

But Argentina is not like most countries. It has a history of fiscal profligacy and monetary mismanagement. It has failed, time and time again, to honor its commitments. As a result, the first-best solution is unobtainable in Argentina. It must settle for second-best.

Fortunately, the second-best alternative of dollarization is quite good—even more so when compared to feasible alternatives in Argentina. Low inflation and the fiscal reforms encouraged by dollarization would allow ordinary Argentinians to flourish once again.



Nicolás Cachanosky es Doctor en Economía, (Suffolk University), Lic. en Economía, (UCA), Master en Economía y Ciencias Políticas, (ESEADE). Fué profesor de Finanzas Públicas en UCA y es Assistant Professor of Economics en Metropolitan State University of Denver.

Why Argentina Must Learn the Virtues of Economic Orthodoxy:

Por Adrián Ravier: Publicado el 8/12/14 en:


Orthodoxy is, according to the first definition of the Royal Spanish Academy, “conformity with generally accepted doctrines or practices.” Those in the economics profession and academic discipline have reached a broad consensus about the importance of fiscal balance (in public finances), monetary stability (in macroeconomics, and in the sub-discipline of monetary theory), and open economies (in international economics).

However, Argentinean economic policymakers have struggled with these three areas historically, instead embracing a heterodox approach.

On the fiscal front, the recent economic history of Argentina has seen successive deficits. The sole exception came in the 2003-2008 period, which was entirely due to an enormous currency devaluation after the policy of convertibility — whereby the exchange rate between the Argentinean peso and the US dollar was fixed at 1 to 1 — and the consequent dilution of public sector salaries. When pay levels recovered after six years, Argentina returned to registering successive fiscal deficits up until today.

The reader might ask what precisely is problematic with maintaining such fiscal deficits. First, it must be observed that servicing a deficit has consequences. On several occasions in recent history, the associated debts have been paid for with new taxes, which have now left us struggling under the greatest tax burden in our history, and the highest in all the American continent. This reduces the efficiency of the productive sector, impeding its ability to generate jobs and wealth.

When society at large begins to refuse to accept ever greater taxes, governments instead turn to internal and external public debt. This was the case during Argentina’s military dictatorships, which saw the first great leaps in our public debt, and was duplicated in the 1990s. Fiscal imbalances may also be financed by printing money, as done during the return to democracy under President Raúl Alfonsín (1983-9), which left us with the worst hyperinflation of our history.

Our Ministry of Finance is now the proud owner of relatively low levels of public debt in relation to GDP, following a decade of economic recovery after the 2001 crisis, while external debt was largely kept low. However, this isn’t the result of a conservative or orthodox economic policy. Rather, it is due to the fact that Argentina has deployed other tools — taking on internal debt with the Central Bank and Social Security Administration (ANSES), and the monetization of her public debts. An enormous proportion of current Central Bank assetsare made up of government bonds, which leaves the nation’s future financial viability in an extremely precarious situation.

Elaborado a partir de “Sector Público No Financiero, Cuenta Ahorro-Inversión-Financiamiento”, Secretaría de Hacienda, Ministerio de Economía. (Consultora Macroeconómica Espert)

Second, we should remember that historically Argentina has struggled to keep public spending down and to control the deficit. The above chart shows the 1975 deficit at 12.1 percent of GDP, which ended in a hyperinflationary episode, dubbed the Rodrigazo after then-Economic Minister Celestino Rodrigo. Currency devaluation managed to deflate spending and bring it to less than 4 percent of GDP, only for the problem to return six years later — following a series of policies, involving pegging the peso to the US dollar, known as the Tablita — to a fiscal deficit of 11.3 percent.

The return to democracy was also characterized by successive fiscal deficits financed by printing money, as well as repeated currency devaluations. The result was the same as before: when the fiscal deficit reached 6.5 percent of GDP in 1988, its monetization brought us to hyperinflation.

The policy of convertibility during the 1990s was accompanied by several orthodox policies, including the privatization of public services, which allowed the government to at least reduce the deficits then being registered by state-owned companies. However, the above chart clearly shows that, aside from 1993, when the government received the profits of the sale of public companies, the government failed to achieve fiscal balance throughout the entire decade.

In this case, following the Brady Plan, public deficit financing came from legitimate public debt, although that clearly risked the sustainability of the government’s economic model. It was only through the support of external creditors who were prepared to finance this imbalance that Argentina was able to maintain economic growth. However, beginning with the Asian financial crisis of 1997, the Russian default in 1998, and Brazil’s devaluation of its currency in 1999, creditors decided to cut off their loans, and pressure grew on the government to abandon convertibility.

Far from the “zero deficit” envisioned in orthodoxy, Argentina registered still further growing imbalances, reaching 7 percent of GDP in 2001, marking the end of convertibility with a monstrous devaluation.

When Néstor Kirchner came to power in 2003, he was met with a strangely favorable situation. As Argentina was barely climbing out of the hole, the 2004 fiscal surplus was some 3.8 percent of GDP. It wasn’t that Kirchnerism involved orthodox, prudent, or conservative policies to reduce the fiscal deficit, but that the hyper-devaluation required to end convertibility significantly reduced the real value of public-sector salaries.

From 2004 onwards, these same employees began to recover their purchasing power, which added to successive social spending plans and led us to new fiscal deficit of 0.3 percent in 2007. Since then, Argentina has continued to widen the gulf between tax receipts and spending, nationalizing the system of pensions, appropriating ANSES funds worth more than US$30 billion, and making heavy use of the money-printing machines of the Central Bank. 2014 is set to close with a fiscal deficit of an estimated 5.9 percent, which is certain to force the government to turn to external debt.

The outcome of this model is still unclear, but it’s unlikely to be very different to our previous economic history throughout the greater part of the 20th century. Argentina’s rulers have systematically ignored basic economic lessons, broken from orthodox fiscal policy, and systematically impoverished their citizens.

Even the limited successes of the military model, or that of the 1990s, weren’t due to the adoption of orthodox policies. Both periods remained extremely far from this line of thinking.

Argentina needs orthodoxy, and has always needed it — although this word has been wrongly interpreted and maligned from almost every quarter within our society.


Adrián Ravier es Doctor en Economía Aplicada por la Universidad Rey Juan Carlos de Madrid, Master en Economía y Administración de Empresas por ESEADE y profesor de Macroeconomía en la Universidad Francisco Marroquín.