Milei’s Policy Challenges (luis pablo de la horra, 11/24/23, Law & Liberty)
Milei’s plan to tackle inflation hinges on the radical step of dismantling Argentina’s central bank (BCRA) and embracing the US dollar as the nation’s official currency. This proposition has sparked fervent debate, evident in the strong resistance it faces from politicians across the political spectrum and prominent academics. Nonetheless, there is a widespread acknowledgment that decisive action must be taken to confront the nation’s foremost economic challenge. Does dollarization represent the optimal strategy to set the nation on a path toward monetary stability?
There is no straightforward answer. Dollarization is not the first best choice, as it deprives central banks of the monetary policy tools they typically employ to address economic crises. For instance, in the face of deflationary pressures, a central bank would typically reduce the policy rates to stimulate economic activity. In a dollarized economy, the national central bank is either eliminated (as Milei proposes) or loses its authority over monetary policy, leaving policymakers with fewer resources to use in the event of a crisis.
Furthermore, the elimination of the BCRA implies the loss of its role as a lender of last resort to address liquidity issues within the banking sector, especially during financial crises. Likewise, the process of dollarization demands an ample supply of dollar reserves, and the BCRA has notably reduced its holdings over the past year. This reduction in reserves could potentially introduce complications in the dollarization process. The question then arises: are these challenges insurmountable?
Undoubtedly, the ideal stance for a country or a group of countries is to uphold monetary policy autonomy. However, the effectiveness of such a policy hinges on the existence of an independent central bank endowed with the capacity to promote price stability through judicious monetary measures. This stands in contrast to the BCRA, which has demonstrated a dismal track record in controlling inflation, as evidenced by the recurring inflationary episodes over the past decades.
A less radical course of action could involve retaining the peso while endowing the BCRA with independence from political interference, thereby curbing its tendency to monetize government debt. Regrettably, this option might be hindered by the BCRA’s lack of credibility and the historical inability of politicians over the past decades to effectively address and control inflation by granting independence to Argentina’s central bank.