On the Political Economy of Monetary Policy

Little progress has been made so far in understanding the causes of Argentina’s worst socio-economic crisis. This paper analyzes the intellectual roots of Argentine convertibility as a small contribution to this necessary and pending discussion. The country implemented a radical monetary reform, technically known as a currency board, although its popular name was “Convertibility”, allegedly launched to impose fiscal discipline and gain credibility. This paper argues that it is very important to understand that Argentina’s problems with the currency board stem from major flaws in its underlying theoretical model, which is based on the assumptions of rational expectations and natural rate of unemployment.