It is no surprise to anyone the key role that the U.S. dollar plays in the Argentine economy, and especially in the mind of the Argentine citizen. The latter is constantly aware of the exchange rate 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 established 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 shows 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 it difficult to transact with other currencies.
If we analyze the Argentine peso’s ability to store value and therefore generate trust among residents and non-residents, it becomes evident why economic agents flee from that 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.
During 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 organization. This not only removed its technical autonomy, giving the government the ability to adulterate methodologies and data, but it 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 direction.
Falsifying statistics is never without cost, especially in terms of credibility and reputation. Measuring the price level is one of the pillars of any modern economy, as it serves as the key reference for:
-the formation of expectations of agents,
-the measurement of poverty and purchasing power,
-the negotiation of wages and various contracts (leading to shorter terms in these last ones)
-decisions regarding consumption, saving, and investment.
Savings are the fuel needed for investment, and the latter is the engine of investment-led growth in all countries around the world. It is investment that drives productivity increases, generates new jobs, and better wages.
For this 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 such as the cost of capital and the real interest rate. Capital always flows where it obtains 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 a per capita product stagnating since 2011. Without reliable prices or data, an economy ceases to allocate resources efficiently and destroys trust: the scarcest input of the Argentine economy.
In all of this, it is worth recalling the fundamental role of prices as mechanisms for intertemporal coordination and information transmission among economic actors, responsible for efficiently allocating scarce resources in any market economy that aspires to be successful. Except during stabilization plans that use nominal anchors, there is consensus in the literature on the importance of allowing prices to be expressed freely.
If we move past 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) reached approximately 9,280% (INDEC, general CPI level, base 2016=100). This unmistakably shows the patrimonial destruction that a person or company would have faced if they had maintained a liquid position in pesos in their assets.
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 U.S. 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 used merely for foreign trade transactions, came to fulfill the functions that the peso left vacant. The prices of durable goods, real estate, and rents are measured in dollars, a phenomenon that does not occur in other developing economies in the region.
This process is not the response to a cultural preference, as is often claimed, but rather 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 recurrent fiscal deficit and its financing through monetary issuance. This phenomenon, typical of a fiscal dominance regime, completely destroys the currency. Even when there was no direct issuance —as during the convertibility— financing through debt in international markets or with multilateral organizations led the debt stock to an unsustainable trajectory, lacking a plan to generate the necessary repayment capacity to meet such commitments, arriving in 2001 with a fiscal financial deficit of 3.2 percentage points of the product and with an upward trend.
When agents perceive that the State manipulates data, changes the 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 remains 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 no one wants, which everyone disposes of as soon as they receive it.
-Weakens the financial system: purchased dollars are not channeled toward local productive credit, as they remain outside the system due to fear, mistrust, and regulatory restrictions.
-Increases macroeconomic vulnerability: any political or credibility shock immediately translates into demand for dollars, exchange rate pressure, and greater 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 with credibility. As long as the State does not manage to rebuild it —through fiscal and monetary discipline, macroeconomic stability, statistical transparency, and institutional development— 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 a unit of account and a store of value, the exchange rate becomes the main determinant of the price level. In this context, devaluations quickly translate to internal prices through the effect known as exchange rate pass-through, even under monetary tightening schemes. Therefore, controlling the nominal variable that most impacts inflation —the exchange rate— is key to achieving the stability necessary for growth and starting to develop.
The three traditional nominal stabilization tools are controlling money aggregates, the interest rate, 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 unhinged —and the dollar continues to be the unit of account— inflationary expectations become unanchored and policy loses much of its effectiveness. That is, even a monetary squeeze, which incurs high costs in terms of product and activity due to deteriorating consumption and investment, does not guarantee the stability of a bimonetary economy.
It succumbs to distress scenarios simply by continuing with the same old idea: floating (either free or managed).
Floating as a theoretical but not practical optimum
What is theoretically optimum —a free floating or band system— can be destabilizing in economies like the Argentine. 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 leading to the famous pre-electoral hedging, inducing situations of FX and financial stress, trigger demand for dollars even under restrictive monetary conditions. In managed floating frameworks, this generates a double cost: loss of reserves and a decline in economic activity (or in its growth rate), 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, it is impossible to sustain the exchange rate given the reserves, as there will be more pesos available to buy the same amount of dollars, making it unsustainable. Furthermore, this monetary anchor depends on the government 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.
By this, it is clear that the currency anchor necessary for stability is credible and sustainable if and only if the economic program has the other two anchors, which lend it theoretical consistency.
Additionally, 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 primarily under foreign legislation and currency, with hard dollar securities being the most accepted by investors. These last ones have the U.S. dollar as their denomination and payment currency, crediting the famous cable dollars or settlement in the accounts of their creditors. This creates a misalignment between assets and liabilities for the treasury, as almost all its revenue is in domestic currency, but it must meet debt services (both interest and principal) in hard currency. This situation causes the treasury to need, in the case of a sharp devaluation, a greater primary result in pesos to meet such 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 a 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 transition from a fixed scheme to a flexible one only when the dollar ceases to be a unit of account, that is, when prices and expectations stabilize.
Chile also offers an illustrative case: it gradually advanced from a band system to free floating, but did so
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