Question:
Argentina’s peso was linked to the U.S. dollar through a currency board for 10 years before it was cut loose. Why did Argentina peg its currency to the dollar in the first place?
Expert Answer:
Initially, in the 20th Century, Argentina was one of the wealthiest and successful economies in the world. The situation started changing after World War I, Argentina started undergoing a slow economic growth rate because of bad policy, political gridlock, and adverse change in trade.
In the 1970s, the Outbreak of the oil crisis concluded the severe debt crisis of the 1980s in Latin America. Government spending was more than the tax, market borrowing, which ultimately gave movement to inflation.
The main reason behind this implementation was to increase people’s confidence in Argentina’s currency after way long inflation. The idea was to fix the exchange rate which shows stabilization in inflation and thus increased flow of capital in Argentina, this step helped to increase the wages and standard of living.
Another benefit witnessed by this step was cheaper imports. It reduced the cost of import and so more goods were getting imported at the same price.
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