Re: dollarization

["Alan G. Isaac" <aisaac@xxxxxxxxxxxx>]

On Mon, 4 Dec 2000, Atilio Todeschini wrote:
> Dear fellows: Im from Argentina, and here we have a big confrontacion
> between our economic secretary and the president of the central bank. what i
> can tell you is that our currency board has sent us to a mayor recesion that
> is lasting for 29 month already.

I am no expert on Argentina, but just to clarify, are
you claiming that Argentina's macroeconomic performance
has been worse since it adopted a currency board than
in the preceeding period?  That is not my impression.
And when choosing institutions, it is important to recall
that one is choosing among the *available* options.

Nevertheless, having a currency board at a time when
the US dollar is appreciating against Argentina's other
trading partners is indeed a burden.
Despite this, export performance looks pretty good and
even overall performance is only moderately bad, if the
data at
 http://www.mecon.gov.ar/progeco/dsbb.htm
are a good indicator.

> I think a dollarization will make things
> get worse.

Dollarization will probably make things better.
It does not get rid of the appreciation problem
mentioned above, but it does help with interest rates.
This might well be worth the loss of seigniorage.
(Of course, that is is better does not imply it is best,
and I am not suggesting that it is.)

> We are in a kind of liquity trap, because we can't lose our
> interest rate to achieve a full employement situation when it's driven by
> Greenspan.

If Greenspan were setting Argentina's interest rates,
and if the currency board were completely credible,
Argentina would have the same interest rates as the US.
Given Argentina's history, freeing monetary policy to
respond to political pressures is not obviously attractive.
Of course much may have changed; I don't know much about
Argentina.

Alan Isaac