% annual growth rate:
Sources: M3 from OECD database and nominal GDP from IMF database, as at February 2022
The medium-term relationship between money and nominal GDP growth in Argentina, 1961-2020
Five-year moving averages of annual % changes, with 1963 being the start of the first five-year period
Comment on monetary trends in Argentina
Argentina provides a perfect textbook example of the unfortunate effects of mismanagement of the economy - and in particular, of public finances and money - on inflation and economic activity. After decades of unsound fiscal policies in the 1970s and 1980s and protectionist policies that resulted in successive public deficits and ever growing public debt, the government resorted to the monetisation of the deficit to pay for public expenditure. The combination of overspending and hyperinflation was accompanied by the rapid depreciation of the currency, and increasing difficulties in servicing the foreign debt, leading ultimately to a default on the debt. The 1980s illustrates how the exponential growth of money (732% annual rate on average over the decade) leads rapidly to hyperinflation (reaching more than 2,000% at the end of the 1980s), and finally the collapse of the economy as a whole.
Monetary stability returned to the country with the adoption of a currency board in 1992, the tied national currency by law at par to the US Dollar. This new monetary regime imposed a more severe and effective discipline on the government and the central bank. It brought back monetary stability, much lower inflation and more stable macroeconomic conditions. These years of monetary and financial stability ended at the end of the 1990s with the collapse of the currency board as a result of different shocks affecting the Argentinian economy (such as the devaluation of the Brazilian real and the appreciation of the US dollar), resulting in the freezing of the bank deposits (the so-called 'corralito') and the collapse in broad money (more than 20% fall in 1992), which led to a severe recession and massive unemployment.
In recent years, under the presidency of Cristina Fernandez, broad money growth was quite high, leading to inflation and output instability. (During this period, the official inflation statistics were widely discredited by international organisations). The new President of the country, M. Macri, has restored the independence of the central bank and has committed to more stable monetary and fiscal policies, although inflation rose sharply in 2016 and again in 2018..