Case studies – Monetary Systems

Argentina’s currency crisis. In the 1990s, Argentina maintained a fixed exchange rate pegging
its currency to the U.S. dollar at the rate of $1 = 1 peso. By 2001, it became increasingly
difficult to maintain this fixed exchange rate. Brazil had devalued its currency against the dollar,
and thus against Argentina’s peso. As a result, Argentina’s exports were no longer competitive.
Making the situation even more difficult was the rise in the dollar against most major currencies,
and the concurrent rise of the Argentine peso. A crisis of confidence ensued prompting many
investors to pull out of the country. Unemployment soared, and the government was forced to
negotiate a loan from the International Monetary Fund.
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Discussion Questions

QUESTION 1: Explain how the value of the peso was affected by changes in the currencies of
both Brazil and the United States. How did Argentina’s pegged exchange rate system affect the
situation?

QUESTION 2: How did a floating peso help Argentina get back on track economically?