As Argentina's economy unravels in street demonstrations, food riots, and political tumult, conventional wisdom suggests that a lethal combination of reckless government spending and a fixed exchange rate is to blame. Large fiscal deficits, so this argument goes, pumped up domestic demand, which fueled inflation and caused the peso to appreciate in real terms, even though it was pegged to the US dollar at a nominal one-to-one exchange rate. As public debt grew, the government's only hope of paying it back was a deflationary clampdown on available money and credit--with a collapse in output, soaring unemployment, and civil disorder almost inevitable.
As Argentina's economy unravels in street demonstrations, food riots, and political tumult, conventional wisdom suggests that a lethal combination of reckless government spending and a fixed exchange rate is to blame. Large fiscal deficits, so this argument goes, pumped up domestic demand, which fueled inflation and caused the peso to appreciate in real terms, even though it was pegged to the US dollar at a nominal one-to-one exchange rate. As public debt grew, the government's only hope of paying it back was a deflationary clampdown on available money and credit--with a collapse in output, soaring unemployment, and civil disorder almost inevitable.