DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION
Discover Nicolas Cachanosky's proposal and discussion on dollarization in Argentina, exploring the reasons behind the call for adopting the US dollar as the official currency. Gain insights into the challenges and potential benefits of this monetary policy shift for Argentina's economy.
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DOLLARIZATION IN ARGENTINA: PROPOSAL AND DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DISCUSSION NICOLAS CACHANOSKY NICOLAS CACHANOSKY METROPOLITAN STATE UNIVERSITY OF DENVER | ASSOCIATE PROFESSOR AMERICAN INSTITUTE FOR ECONOMIC RESEARCH | FELLOW ncachano@msudenver.edu www.ncachanosky.com
OUTLINE Overview: Why dollarize Argentina? A proposal of dollarization for Argentina Discussion 2 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
OVERVIEW: WHY DOLLARIZE ARGENTINA 4 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
OVERVIEW: WHY DOLLARIZE ARGENTINA 5 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
OVERVIEW: WHY DOLLARIZE ARGENTINA The Argentine central bank (Banco Central de la Rep blica Argentina BCRA) is founded in 1935 Average (yearly) inflation rate for the 1935-2018 period 52% - 55% This number is robust to (a) Dropping the years of hyperinflation (late 1980s & and early 1990s) (b) Dropping the years under a currency board (1991-2001) What does this mean? High inflation happens with all type of governments (Peronistas, Radicals, Military governments, Cambiemos, etc.) In Argentina, inflation is an institutional institutional problem Therefore, it requires an institutional institutional solution (it is not a problem of choosing the right monetary authorities) The only years with low inflation took place under a currency board regime 6 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
OVERVIEW: WHY DOLLARIZE ARGENTINA 7 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
OVERVIEW: WHY DOLLARIZE ARGENTINA Why consider dollarization in Argentina? Argentina has lost its central bank credibility (a currency board is not enough anymore) The less credibility in government and the more crises the country has, the stronger the institutional reform has to be Argentina needs and institutional institutionalshock Dollarization is a necessary but not a sufficient necessary but not a sufficient ingredient of the needed institutional shock How do countries go from poor to rich (or vice-versa) Good or bad luck of historical events Political leader leading institutional changes Institutional reforms are hardly the result of good luck 8 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
A PROPOSAL OF DOLLARIZATION FOR ARGENTINA
A PROPOSAL OF DOLLARIZATION FOR ARGENTINA The proposal Mimic a USD-based free-banking regime Shutdown the BCRA and replace the ARS with USD Let commercial banks issue their own banknotes convertible into USD A similar regime exists today in Ireland, Scotland, and Hong-Kong Provide a new source of revenue to banks increasing financial stability Allow off-shore banking (take the banks outside the reach of the median Argentine politician) Privatize public banks 10 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
A PROPOSAL OF DOLLARIZATION FOR ARGENTINA The proposal (continued) Produce coins domestically (like Panama s Balboa) Dollarization should be flexible (currency competition): Allow free adoption of any other currency Argentines already save and think in USD, but the economy may move to another currency (network) such as the EUR, the AUD, etc. 11 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
A PROPOSAL OF DOLLARIZATION FOR ARGENTINA No need of a constitutional reform The Constitution gives the power, but not the mandate, to the federal government to issue money (and coins) The Constitution gives the power the federal government to regulate (issue legislation) for (other) banks to issue their own currencies This reach in who can issue money comes from the first Constitution of 1853, when it was common for private banks to issue their own banknotes 12 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
A PROPOSAL OF DOLLARIZATION FOR ARGENTINA Is dollarization feasible? Things to consider How to estimate the net reserves available to dollarize the economy Are BCRA short-term liabilities going to be dollarized or swapped for a long-term bond nominated in USD? Can Argentina obtain a credit to be used in a dollarization project? Two moments for dollarization to take place Late 1990s Was the 2001 crisis (and what came after) less costly than dollarizing Argentina? During Mauricio Macri s government What it Macri lost the election but left a dollarized country? Argentina is loosing the window to have a smooth dollarization 13 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
A PROPOSAL OF DOLLARIZATION FOR ARGENTINA DOLLARIZATION RATE AND NOMINAL EXCHANE RATE 300 Dollarization with BCRA liabilities Dollarization without BCRA liabilities 250 Nominal exchange rate 200 150 100 50 0 Apr-17 Nov-17 Apr-18 Nov-18 Apr-19 Nov-19 Feb-17 Mar-17 Sep-17 Feb-18 Mar-18 Sep-18 Feb-19 Mar-19 Sep-19 Jan-17 Jul-17 Aug-17 Jan-18 Jul-18 Aug-18 Jan-19 Jul-19 Aug-19 May-17 Dec-17 May-18 Dec-18 May-19 Dec-19 Jun-17 Oct-17 Jun-18 Oct-18 Jun-19 Oct-19 14 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
DISCUSSION What do international academic research say about dollarization It is a valid and serious serious question It may be convenient or not What do (most) Argentine economists say about dollarization (in Argentina) Such question does not even deserve an answer It is obviously a bad idea (it not a serious question) Some reactions read close to be a mockery of someone who is willing to consider the pros and cons of dollarization What are the main objections to dollarization in Argentina? 16 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
DISCUSSION Loose of monetary policy Yes that is the whole point! An overstatement of the benefit of having a domestic monetary policy Calvo and Reinhart The history of the BCRA suggests that having a good is not feasible Avoid falling into a Nirvana fallacy or wishful thinking Compare the effects of dollarization with a realistic, not idealized, BCRA behavior good domestic monetary policy 17 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
DISCUSSION Dollarization is a cath-22: If reforms are needed to dollarize, then dollarization is not needed anymore One of the main reasons behind the idea of dollarization is institutional Dollarization is not only about monetary policy If the ideal ideal institutional reform takes place, then, of course, dollarization is not needed But, under a realistic institutional reform there can still be an institutional benefit in dollarizing the economy Once again: Avoid an institutional-Nirvana-fallacy institutional Minimum reform for dollarization Dollarization is not needed anymore 0 Argentina today Realistic reform 100 (no reform) (ideal reform) 18 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
DISCUSSION Reforms need to be done before What type of reforms? Labor market legislation Reduce government spending (social welfare reforms, etc.) International trade Given that Argentina is significantly robust to this type of reforms, dollarization should be used as the trigger to finally execute these other reforms before dollarization takes place 19 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
DISCUSSION If the BCRA is closed, there will be no lender of last resort There will be no central bank as lender of last resort Banks can still resort to the international financial markets for bailouts Financial bailouts will be granted following Bagehot s rule If a bank is illiquid but solvent, it should be able to get a loan If a bank is illiquid and insolvent, is should not be bailed out Alternatives for too big to fail banks Create an emergency fund (i.e. managed by the Treasury or a special commission) Have the Treasury offer a collateral for a bailout 20 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
CONCLUSIONS Dollarization requires the support of domestic think-tanks and economists Argentina lacks this support Argentine politicians do not want to talk about dollarization Significant transfers from the BCRA to the Treasury to political spending With the new Peronist government that took office in December 10th, 2019, the likelihood of dollarization is now probably zero Unless massive crises forces the move (a new case of hyperinflation) Other benefits of dollarization Strengthen institutional limits to populist governments Could the Kirchners have done so much populism if Argentina were dollarized? Anything to learn from the experience here in Ecuador? Positive externalities for the region if Argentina joins the dollar network and gets its economy in order 22 DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION DOLLARIZATION IN ARGENTINA: PROPOSAL AND DISCUSSION Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com Nicolas Cachanosky | ncachano@msudenver.edu | www.ncachanosky.com
DOLLARIZATION DOLLARIZATION IN ARGENTINA: PROPOSAL AND IN ARGENTINA: PROPOSAL AND DISCUSSION DISCUSSION NICOLAS CACHANOSKY NICOLAS CACHANOSKY METROPOLITAN STATE UNIVERSITY OF DENVER | ASSOCIATE PROFESSOR AMERICAN INSTITUTE FOR ECONOMIC RESEARCH | FELLOW ncachano@msudenver.edu www.ncachanosky.com
