It is no surprise to anyone the key role that the US dollar plays in the Argentine economy, and especially in the mind of the Argentine citizen. The latter is constantly attentive to the quotation of the North American currency, and this happens for a simple reason: Argentina is a bimonetary economy, “de facto dollarized”.
If one turns to any basic manual of macroeconomics or finance, the first thing stated when talking about money are the three essential functions that every currency should fulfill: medium of exchange, unit of account, and store of value.
Recent— and not so recent— Argentine economic history demonstrates that, except for brief periods of stability, the Argentine peso does not adequately fulfill two of those three functions. In particular, it fails as a store of value and as a unit of account. On the contrary, the only function it partially maintains is that of medium of exchange, and that only because the State imposes its use as legal tender, that is, mandatory acceptance in internal transactions, making the transactional use of other currencies difficult.
When we analyze the capacity of the Argentine peso to store value and thus generate trust among residents and non-residents, it becomes evident why economic agents flee from this currency. When trying to evaluate its performance, a first problem arises: the lack of reliable measurements and statistics regarding inflation during the period 2007–2016.
In those years, the National Institute of Statistics and Censuses (INDEC) was intervened by the Executive Power, which incorporated officials from the Ministry of Economy into the agency. This not only stripped it of technical autonomy, granting the government the ability to adulterate methodologies and data, but also eliminated for a decade the capacity of economic agents to analyze reliable statistics on activity, employment, poverty, and prices. In other words, the economic system completely lost its compass and, therefore, its course.
Falsifying statistics is never free, especially in terms of credibility and reputation. Measuring the price level is one of the pillars of any modern economy, as it serves as a key reference for:
-the formation of agents' expectations,
-the measurement of poverty and purchasing power,
-wage negotiations and various contracts (causing a shortening of terms in these)
-consumption, savings, and investment decisions.
Savings are the fuel that investment needs, and the latter is the engine of investment-led growth in all countries of the world. It is investment that drives increases in productivity, generates new jobs, and better wages.
For that virtuous growth process to materialize, a stable macroeconomic environment that provides trust and predictability is essential. Only then is it possible to accurately estimate the costs and returns of an investment, based on key statistics like the cost of capital and the real interest rate. Capital always moves where it gets the best risk-adjusted return, and the Argentine context from 2003 to today has only increased the insecurity and skepticism of investors, generating a lack of credit and abysmal rates, both for the sovereign and for private entities.
It should not be surprising, then, that the Argentine economy, lacking stability and credibility, is deeply undercapitalized, with per capita product stagnant since 2011. Without reliable prices or data, an economy stops allocating resources efficiently and destroys trust: the most scarce input in the Argentine economy.
To all this, it is worth recalling the fundamental role of prices as mechanisms for intertemporal coordination and transmission of information among economic actors, responsible for efficiently allocating scarce resources in any market economy aspiring to be successful. Except during stabilization plans that use nominal anchors, there is consensus in the literature on the importance of allowing prices to express freely.
If we leave behind this dark phase and take the period January 2017–September 2025, that is, from the normalization of INDEC to the present, the accumulated inflation measured by the Consumer Price Index (CPI) has reached approximately 9,280% (INDEC, general CPI, base 2016=100). This unequivocally shows the asset destruction that a person or company that maintained a liquid position in pesos would have suffered.
In the face of such a loss of purchasing power, the rational response of economic agents was to take refuge in a currency that preserved its value: the US dollar. Here emerges the central phenomenon of the Argentine economy, which differentiates it from other emerging economies: bimonetarism. The dollar, which in other parts of the world is merely used for foreign trade operations, has come to fulfill the functions that the peso left vacant. The prices of durable goods, real estate, and rents are measured in dollars, a phenomenon not seen in other developing economies in the region.
This process is not a response to a cultural preference, as is often claimed, but a rational reaction to years of crisis and macroeconomic destabilization. The root of this problem lies in one of the most persistent ills of the Argentine economy: the recurring fiscal deficit and its financing through money issuance. This phenomenon, typical of a regime of fiscal dominance, completely destroys the currency. Even when there was no direct issuance— as during the convertibility— the financing via debt in international markets or with multilateral organizations led the stock of debt to an unsustainable trajectory, lacking a plan to generate the necessary payment capacity to meet such commitments, reaching 2001 with a financial fiscal deficit of 3.2 points of the product and with an upward trend.
When agents perceive that the State manipulates data, changes rules, and erodes the value of the currency, they seek refuge in an exogenous asset that does not depend directly on domestic policy. Thus, the dollar becomes the de facto unit of account and the dominant store of value, while the peso is relegated to its function as a medium of exchange imposed by law.
This dual structure generates profound consequences:
-Weakens monetary policy: the Central Bank issues a currency that nobody wants, which everyone disposes of as soon as they receive it.
-Weakens the financial system: the purchased dollars do not channel into local productive credit, as they remain outside the system due to fear, distrust, and regulatory restrictions.
-Increases macroeconomic vulnerability: any political or credibility shock is immediately translated into demand for dollars, exchange pressure, and higher inflation.
Argentine bimonetarism is not a cultural or psychological phenomenon but the logical result of decades of instability, chronic inflation, and institutional destruction. A national currency is not imposed by decree: it is earned through credibility. As long as the State does not manage to rebuild it—through fiscal and monetary discipline, macroeconomic stability, statistical transparency, and institutional development— the Argentine society will continue to operate with two currencies.
The exchange rate as the dominant nominal variable
The question then is: how does an economy governed by two currencies change? Should the policies be the same?
Given that the dollar fulfills the functions of unit of account and store of value, the exchange rate becomes the main determinant of the price level. In this context, devaluations quickly transmit to domestic prices through the well-known exchange rate pass-through effect, even under situations of monetary tightening. That is why controlling the nominal variable that most impacts inflation—the exchange rate— is key to achieving the stability necessary to grow and begin to develop.
The three traditional tools used by policy makers are controlling monetary aggregates, interest rates, and the exchange rate. In an economy where the domestic currency is not a reliable vehicle for savings or prices, the monetary transmission channel becomes weaker than in other economies. The Central Bank can restrict the monetary base and/or raise the interest rate, but if the exchange rate becomes uncontrolled— and the dollar continues to be the unit of account— inflationary expectations become unanchored, and the policy loses much of its effectiveness. In other words, even the monetary squeeze, which carries high costs in terms of product and activity due to the deterioration in consumption and investment, does not guarantee the stability of a bimonetary economy.
It succumbs in the face of distress scenarios only by continuing with the same old idea: floating (whether free or managed).
Floating as a theoretical optimum, not practical
What is theoretically optimal —a free or banded floating— can be destabilizing in economies like the Argentine one. Exchange rate volatility translates into inflation, deteriorates expectations, and erodes the credibility of economic programs. In a country with high political polarization, pre-electoral episodes that involve the famous pre-electoral hedging, inducing situations of FX and financial stress, trigger demand for dollars even under restrictive monetary conditions. In managed float schemes, this generates a double cost: loss of reserves and a decline in economic activity (or in the growth rate of the same), in addition to the signal sent to the market of being constantly very close—or even over—the exchange rate band.
A currency anchor is necessary, but its credibility depends on the monetary anchor. With money issuance, the exchange rate cannot be sustained given the reserves since there will increasingly be more pesos available to purchase the same amount of dollars, making it unsustainable. Likewise, this monetary anchor depends on the Treasury respecting its intertemporal budget constraint and not resorting to issuance, which—given Argentina's inability to access international credit markets— is its only source of financing.
With this, it becomes clear that the currency anchor necessary for stability is both credible and sustainable if and only if the economic program has the other two anchors, which provide it with theoretical consistency.
In addition to this, it is also important to consider the impact that a sudden devaluation, caused by financial panic and/or a sudden reversal of capital flows (sudden stops), can have on fiscal sustainability. It should be noted that Argentina, in the rare occasions when it can place debt in international markets, does so, mostly under foreign legislation and currency, with hard dollar bonds being the most accepted among investors. The latter have the US dollar as the currency of denomination and payment, crediting the famous cable dollars or settlement in the accounts of their creditors. This produces a currency mismatch between assets and liabilities for the treasury, as almost all its revenue is in domestic currency, but it has to face debt service (both interest and principal) in hard currency. This situation causes the treasury to require, in the event of a strong devaluation, a greater primary result in pesos to meet these commitments.
Conclusion: floating in a bimonetary economy is sinking
It is clear, then, that floating may be the theoretical optimum, but not the practical one: as long as the dollar remains the unit of account, Argentina cannot—nor should—float. Under these conditions, floating means sinking.
Examples like Israel in the nineties show that a country can move from a fixed scheme to a flexible one only when the dollar stops being the unit of account, that is, when prices and expectations stabilize.
Chile also provides an illustrative case: it gradually advanced from an expanding band system It moved towards free floating, but it did so in a context where the local currency never lost its role as a unit of account.
In the face of such situations, a more appropriate exchange regime for an economy with the aforementioned characteristics would be the adoption of a crawling peg. This scheme of small, pre-announced devaluations aims to prevent the over-appreciation of the currency, avoiding the nominal volatility that can bring so many adverse effects. The pace of devaluation should be adjusted as inflation converges to the devaluation rate, gradually being reduced.
Economies like Argentina face the challenge of first rebuilding trust in their own currency before they can liberalize their exchange rate.
Nominal stability is neither a luxury nor an obsession: it is the prerequisite for any sustainable development.
Comments