Lorenzo Bernaldo de Quirós
In his nearly two years in office, President Javier Milei has radically changed the course of the Argentine economy. His macroeconomic policy has succeeded in drastically reducing inflation and eliminating the public deficit. This, combined with his deregulation program, has resulted in strong economic growth and a sharp decline in poverty and unemployment. However, this virtuous scenario has been accompanied by a fixed but adjustable exchange-rate system, which is not only inconsistent with the Argentine leader’s philosophy but, as economic theory teaches and empirical evidence supports, represents a potential source of major instability.
Under the exchange rate system that Milei implemented earlier this year, the peso floats freely within a band (between 951 and 1,471.4 pesos to the dollar on the wholesale market). The Central Bank of the Argentine Republic intervenes in the market if the exchange rate approaches or exceeds these limits. If the dollar approaches the upper limit of the band, the Central Bank sells foreign currency to curb its rise. Conversely, if the dollar approaches the floor, it will buy to prevent an excessive fall. However, this apparent mixture of fixedness and flexibility is precisely the weak point of the system.
When a government tries to maintain a fixed but adjustable exchange rate, it creates perverse incentives. If markets perceive that the currency is overvalued, expectations of devaluation are created, prompting speculators and citizens themselves to take their capital out of the country to avoid losses. To defend the exchange rate, the central bank must use its international reserves, but these are finite. The situation is further aggravated in the case of a country where these reserves are scarce, as in Argentina, making it very vulnerable to potential attacks by speculators.
History is littered with examples of exchange rate systems, such as the one established in Argentina, that were destroyed by speculation. This happened with the European Monetary System exchange rate mechanism, which suffered a massive speculative attack in 1992 by hedge funds. The British pound and the Italian lira, which were part of that system, were sold off massively. The central banks of the United Kingdom and Italy tried to defend their currencies by raising interest rates and using their reserves, but the pressure was unsustainable. In the end, they had to let their currencies float. Similarly, the Mexican peso crisis of 1994 and the Asian crisis of 1997 were precipitated by the collapse of exchange rate models such as the one described above. In all these cases, the perception that currencies were overvalued and reserves were insufficient to maintain the exchange rate triggered capital flight, forcing chaotic devaluations and causing deep economic recessions.
Given the lessons offered by experience, Argentina should adopt a floating exchange rate system. Under this system, the value of the peso would be set by supply and demand in the foreign exchange market, without intervention by the central bank. This benefits the Argentine economy in crucial ways.
First, it would act as an automatic buffer against external shocks or changes in domestic economic conditions. For example, a fall in export prices would not require an abrupt and disorderly devaluation, as the currency would depreciate gradually, helping to preserve the competitiveness of exports.
Second, allowing the peso to adjust freely would prevent the accumulation of imbalances and pressures that often lead to massive devaluations and crises. Corrections would occur continuously and in a less volatile way, reducing the risk of currency “bubbles.”
Third, by not having to defend a fixed exchange rate, the central bank would regain control over its monetary policy. This would allow it to focus on its main objective: controlling inflation. Instead of using interest rates and reserves to defend the dollar, it could use them to stabilize domestic prices.
Fourth, letting the peso float would be the clearest signal that the government is confident that its fiscal and monetary consolidation plan is sustainable in the long term. It would show investors and citizens that the macroeconomic stability achieved is genuine and that the exchange rate does not need to be artificially sustained.
Fifth, in a floating exchange rate system, there is no fixed currency value to maintain because it is constantly determined, making it very difficult to identify a specific weakness to be exploited by speculators. As a result, speculators have less incentive to act because, among other things, the possibility of reserves being depleted is eliminated.
The economic reasons for implementing a floating exchange rate system in Argentina are reinforced by the political and electoral uncertainty prevailing in the country. If President Milei does not achieve good results in the upcoming legislative elections in October, his ability to continue his reform program will be significantly compromised. Floating the peso, apart from being desirable for the reasons outlined above, would help avoid jeopardizing what Milei has achieved so far.
This post is based on an article that was published in Vozpópuli (Spain) on September 11, 2025.