Following a series of military regimes, the "Radical" party - headed by Alfonsin was appointed to power in 1985. As one of the central targets of this party was the stabilization of the financial market and control of the inflation rate - an ongoing concern in most South American countries. One of Alfonsin's decrees was to remove the Peso in favor of a new currency - the Austral - which was initially attached parity to the dollar.
By 1991, the "Radical" party, having failed in their attempt to control inflation and having gone a period of hyperinflation akin to that suffered in Germany following World War I, had been replaced by the Peronist party, who headed by Menem replaced the Austral by the Peso and implemented a dollar peg through a currency board.
THE DOLLAR PEG AND CURRENCY BOARD.
In the case of Argentina post 1991, it is important to describe the type of currency peg that was introduced and the potential impact on the Argentinean economy. .
There are different types of currency pegs, but generally, when talking about pegging a currency to a (usually) stronger currency implies fixing the exchange rate in search of greater economic stability. The most famous example of the currency peg began in 1944 with the Bretton Woods agreement, at which participating countries fixed their respective exchange rates against the dollar. It is important to note that a peg is the process of fixing a currency within a band of a stronger currency, which provides the nation's central bank some flexibility and control over money supply. .
Pegs have the advantages of being simple and clear, to control inflation (mainly inheriting the inflation rate of the stronger country) and greatly reducing currency risk, thereby increasing investor confidence. .
However, a government concerned about huge capital outflows might prefer to go one step further than a currency peg: and set up a currency board. .
CURRENCY BOARD.
