Monetary Policy in Dollarized Economies: The Argentine Experience MIGUEL A. KIGUEL Universidad Di Tella & econ views December 2006 Monetary Policy in dollarized economies: Outline General reflections about dollarization How does dollarization affect the banking system
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The Argentine Experience
MIGUEL A. KIGUEL
Universidad Di Tella & econviews
Monetary Policy in dollarized economies under different exchange rate regimes
Argentina is one of the few countries that managed to de-dollarized
Dollarization in the banking system increased over time, especially once deposits stabilized in the late nineties
Prior to the crisis they reached 60% of the total
Checking accounts and most transactional balances have remained in pesos
The interest rate differential between pesos and dollars never disappeared.
Both rates increased at times of crises, but peso rates increased more
Ex-post real interest rates in pesos remained very high
The 1994 Mexican Crisis and its impact on Argentina
Deposita fell by 20%, initially pesos, then dollars, then free fall for all
The Central Bank financed 70% of the fall in deposits and minimized the impact of credit
Implications of “surviving” the Mexican crisis
Fixed exchange rates and monetary policy in dollarized economies: Lessons from Argentina
There were no enough financial resources to withstand the attack on the currency and the bank panic of 2001 and banks reduced credit
Some stylized facts of dollarization during the period of the hard peg in Argentina
A credible deposit insurance?
The “Original Sin” Redemption?
The de-dollarization increased the demand for pesos. Currency substitution in reverse
The banking system now works in pesos for Deposits…..
…. And for loans
But private sector deposits have not recovered their previous levels. Less financial deepening
Where does Argentina stand today?
Inflation is under control but remains in the two digits
The Central Bank targets the growth of M2
Money supply is controlled by issuing Central Bank bills
The stock of central bank debt is rising
Policy interest rates have been rising, but they are still relatviley low.
Real interest rates are now very low
The appears to be undervalued
Where does Argentina stand?
Lessons from Argentina’s dollarization and de-dollarization processes
Implications for and questions about Monetary Policy in Dollarized Economies