Argentina's 1991-2001 Currency Board: An Experiment in Fixing the Exchange Rate

Sustainability of an Anti-Inflationary Peg

A government successfully reduces hyperinflation by fixing its currency's exchange rate to that of a major, stable foreign currency. A year into the policy, while inflation remains low, the domestic economy has entered a deep recession with high unemployment, leading to significant political unrest. Based on this scenario, which factor poses the most critical threat to the long-term success of the fixed exchange rate policy?

Once a high-inflation country successfully stabilizes its price level by fixing its exchange rate, the most significant challenge to maintaining this stability over the long term is preventing a trade deficit from developing.

The Political Economy of Fixed Exchange Rates

The Trade-off of a Fixed Exchange Rate