Inflation is skyrocketing in Argentina and the country seems unable to ever maintaining any form of nominal stability. In my view the problem with lack of nominal stability in Argentina is, however, not fundamentally monetary – it is rather a constitutional problem. Hence, it seems like the country’s politicians are able to make the decisions that are necessary to maintain monetary stability.

So even though I am quite critical about different suggestions for dollarization in different countries I for some time have thought that in the case of Argentina there is no reason to try to come up with an “optimal” monetary regime. In many ways Argentina is economically-politically a failed state. Hence,  simply getting rid of the Argentine peso might be the least horrible solution.

Nicolas Cachanosky and Adrian O. Ravier in a new very interesting paper – A Proposal of Monetary Reform for Argentina: Flexible Dollarization and Free Banking – has an interesting proposal for dollarization in Argentina.

Here is the abstract:

Argentina’s economy and monetary institutions are, once again, experiencing a serious crisis. In this document, we propose a monetary reform for Argentina that consists of flexible dollarization plus a free banking regime. By flexible dollarization, we mean that the peso should be replaced with the U.S. dollar as a first step, but the market should have the freedom to interact with any selected currency. Therefore, the country does not become attached the U.S. dollar; on the contrary, it becomes a free currency country. By free banking, we mean giving financial institutions permission to issue their own banknotes convertible into U.S. dollars or any other currency or commodity of their choice.

It should be noted that the problems of the Argentine economy go beyond those of monetary policy. This proposal should not be understood as a sufficient reform to fix the Argentinean economy but as a necessary one. This proposal should also not be understood as a monetary panacea but as a monetary framework that is still superior to one provided by the Argentine central bank BCRA and Argentine policy makers to their country.

There is only major problem with the suggestion – Argentine policy makers seem unable to make sensible decisions. That said, ideas matter. In fact they matter a lot so hopefully one day some visionary Argentine reformist government will pick-up Cachanosky-Ravier monetary reform plan.

HT Anthony Evans