Argentina’s Peso Crisis, Capital Flows and Financial Fragility in Emerging Markets
On May 4, the Banco Central de la Republica Argentina, the country’s central bank, raised policy interest rates to a whopping 40 percent to stem the rapid depreciation of the national currency, the peso. The surprise rate increase was the third in a week after the central bank failed to halt the decline in the peso by spending $4.3 billion of foreign exchange reserves in just one week. In addition, the Argentine authorities reduced fiscal deficit target and announced new measures to calm the markets.
Market observers were confident that rapid-fire rate hikes and other measures will restore currency stability, but the Argentine peso plunged…