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.

Cryptocurrencies and the Denationalisation of Money

Por Nicolás Cachanosky. Publicado el 28/2/18 en:


In Denationalisation of Money (1976), Hayek put forward the idea of currency competition. The money supply should be determined through a competitive market process rather than by experts in charge of central banks. Hayek’s proposal would have private banks issue their own fiat currencies, competing to provide the currency with the most stable purchasing power. This, Hayek argued, would provide a more stable money supply than experts at central banks can.

A number of problems with respect to Hayek’s proposal have been raised. For instance, since banks issue fiat (i.e., nonconvertible) currency, a time-inconsistency problem arises. A bank manager who discounts future revenue at a high rate may be tempted to increase the quantity of his bank’s currency and buy assets with it before the currency loses purchasing power and the bank loses its clients. Another problem is that since money is a network good, it is highly unlikely we would see a number of currencies competing with each other. And if there is only one currency, then its purchasing power may not be as stable as Hayek predicted (see Will Luther’s discussion here).

Hayek’s proposal dates to the 1970s. Do cryptocurrencies in the 21st century manifest Hayekian currency competition? Certainly, there is a case to be made. A number of different independently issued nonconvertible cryptocurrencies (Bitcoin, Litecoin, Ethereum, etc.) compete with each other. Bitcoin in particular has brought to the public’s attention a means of payment independent of the government.

There are, however, two important differences from what Hayek had envisioned. In the first place, cryptocurrencies are not issued by banks. The banks Hayek proposed were intended to be discretionary (though, competitively constrained) issuers of fiat money. Cryptocurrencies are typically issued in a predetermined fashion. Related, cryptocurrency issuers do not take deposits as a Hayekian bank would.

The second difference is more substantial. In Hayek’s proposal, banks would aim at fixing the purchasing power of their currencies. But most cryptocurrencies fix the supply, making their prices highly volatile. As I note in a recent short paper, this fact makes it questionable that cryptocurrencies follow the right monetary rule.


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.

Cantillon Effects and Money Neutrality

Por Nicolás Cachanosky. Publicado el 29/6/17 en:


Money neutrality is a key principle in monetary economics. As might seem obvious, the amount of goods that can be produced depends on the availability of factors of production (such as capital and labor) and on technological knowledge. For instance, the fact that more dollars are in circulation does not mean we can produce more tables and chairs. But if we have better technology, more labor, or more wood, then we can produce more tables and chairs.

On the other hand, Cantillon Effects are equally plausible. The Cantillon Effect refers to the change in relative prices resulting from a change in money supply. The change in relative prices occurs because the change in money supply has a specific injection point and therefore a specific flow path through the economy. The first recipient of the new supply of money is in the convenient position of being able to spend extra dollars before prices have increased. But whoever is last in line receives his share of new dollars after prices have increased. This is why when the Treasury’s deficit is monetized, inflation is referred to as a non-legislated tax. In these cases, the government has seized purchasing power (rather than physical bills) from its citizens without congressional approval.

Can these two convincing intuitions be compatible with each other? In principle, it could be argued that Cantillon Effects focus on the short-term effect of changes in money supply, but that money neutrality is a long term characteristic of money. Short-run effects in resource allocation are typically not denied, usually due to the fact that they alter “sticky” prices, such as wages.

However, it is important to point to one key difference between the scope of Cantillon Effects and money neutrality. The Cantillon Effect refers to relative prices at the micro level. Money neutrality, on the other hand, refers to the aggregate production function, which means that relative prices are only captured in general terms, such as the real wage captured as a nominal wage index over a price-level index.

The first issue to note about this difference in scope is that the same wage and price-level indices could be attained with different relative prices at the micro level. It is possible that a change in money supply could trigger a change in relative prices at the micro level that ultimately results in the same wage and price levels. But this means that the composition of output would be different with and without the change in money supply. This composition of output is absent when money neutrality is envisioned as the level of output, independent of money supply.

Let us say that demand for each good is determined by consumers’ preferences and that supply is determined by the availability of factors of production and technology. If for some period of time a change in money supply alters resource allocation, then sustaining that money is neutral in the long-run (meaning that the economy always converges to the same equilibrium), then the equilibrium determinants should remain unchanged. In other words, the short-run effects of a change in money supply should not have an effect on either consumer preference or on factors of production. There are no reason for this to be the case. This means that money neutrality (at the micro level) is an assumption more than a fact.

Money neutrality might be a useful assumption in some cases. But money neutrality should not be taken as a fact, especially by policy-makers who might ignore the long-term consequences of monetary policy.


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.