How does the policy trilemma help to explain the failure of Argentina's currency board?

Question

What will be an ideal response?

Answer 1

In the early 1990s, Argentina's commitment to capital mobility and to the one-peso-equals-one-dollar exchange rate fostered optimism. When that optimism was challenged by the peso crisis in Mexico, the Argentine people became aware that the soundness of the banking system was in their hands. The combination of fixed exchange rate and capital mobility prevents the central bank from conducting an independent monetary policy, such as providing needed liquidity to protect bank deposits. Instead, the regime relies on foreign creditors to step in when citizens lose confidence in the banks. This worked well enough in the mid-1990s, but it became increasingly obvious that Argentina's economy could not grow unless the peso was devalued, so that exports and domestically-produced import substitutes could compete with global products. Because the currency board did not allow for devaluation, either it or capital mobility would have to end.