Hard Peg versus Soft Float. A Tale of Two Latin-American Countries

Martin Grandes and Helmut Reisen

Revue économique, 2003, vol. 54, issue 5, 1057-1090

Abstract: This paper deals with how the exchange-rate regime of Argentina and Mexico shaped macroeconomic performance over the period 1994-2001. The purpose of the analysis is to draw lessons for Latin American and other countries on whether and how the choice of the exchange-rate regime can help sustained growth. As it is impossible to isolate the growth effect of the exchange-rate regime in a comparative country study, the paper emphasises those macro variables that have been identified in the theoretical and empirical literature as important channels through which the choice of the regime affects economic performance: a) investment, b) trade openness, c) capital flows and d) fiscal or institutional rigidities and public debt sustainability. These channel checks confirm 1997/1998 as the ?breakeven? year, since Mexico?s managed floating currency regime has yielded, higher pay off relative to Argentina?s currency board, faced with successive external shocks.

Date: 2003
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