Argentina : The end of a clever idea ?

This paper asks why Argentina slipped into a deep crisis with its currency board (CB) arrangement though this regime had received so much academic support as a stabilisation device. It is argued that a CB does not make devaluation risks disappear but translates them into an explosive, strongly pro-cyclical mixture of exchange rate, financial system and default risk which might trap a country in a recession cum debt crises when hit by a large exogenous shock. Thus, a CB should only be introduced after careful consideration. Countries already in a CB should aim at excess reserves and a very sound fiscal position. JEL-Classifications: F33, E42