Digital Currencies—More than a Passing Fad?

The financial system is currently in a period of exceptionally rapid technological and organizational change, with the adoption of cloud computing to store and process financial data, artificial intelligence to analyze it, and blockchain to secure it. It is fashionable to assert that digital currencies will be part of that future. But cryptocurrencies like Bitcoin are too volatile to possess the essential attributes of money. Stablecoins have fragile currency pegs that diminish their utility in transactions. And central bank digital currencies are a solution in search of a problem.

Argentina Currency Peg and Fiscal Reforms (A)

Case (A) starts by reviewing several attempts made by three consecutive Argentine governments between 1973 and 1989 to fight the three-digit inflation rates that had troubled the country since the end of World War II. Next, the implementation of the currency peg under the broad umbrella called the “convertibility plan” is discussed and its rationale is explained in connection with the Central Bank's role in controlling inflation and market expectations. The case then outlines the fiscal reforms introduced in the early 1990s concerning public finance, market regulation, and social security. Finally, the outcomes of these policies are briefly summarized.Argentina's currency collapse provides a vivid illustration of the perils of government control on exchange rates in an export-dependent economy. Students will learn and understand (1) the role of herding and expectations in currency collapse; (2) the interdependence of fiscal and monetary policies; (3) monetary base management and its effects on inflation; (4) the advantages and drawbacks of currency pegs; (5) the story of the late 1990s financial and currency crises.

Gulf states will not abandon dollar peg in medium term

Subject Gulf currency pegs. Significance The collapse in oil prices has led to some speculation that fiscal pressure may lead some Gulf Cooperation Council (GCC) countries to abandon their longstanding currency pegs to the dollar. Some oil exporters in other regions have abandoned their own pegs over the last year. One signal of market concern is the discounts now being applied to Gulf currency forwards, indicating a risk of devaluation, albeit relatively low. Impacts Foreign investors in the Gulf can remain confident of exchange rates. The transition to the long-planned Gulf monetary union will be delayed further until the 2020s. Real-effective exchange rates will remain overvalued, indicating poor international competitiveness.

Hong Kong and Denmark will keep currency pegs

Subject The longevity and outlook for currency pegs. Significance The abandonment of the Swiss franc's three-year-old peg to the euro on January 15 put into question the longevity of pegged exchange rate arrangements. It also highlights how unusual such arrangements are today. Impacts The SNB will still have to continue to intervene in foreign-exchange markets to stabilise the Swiss franc. The SNB move will not cause Danish authorities to stop pegging the Danish krone to the euro. The near- and medium-term longevity of the Hong Kong dollar peg to the US dollar will not be questioned.

Managing Currency Pegs

The combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity. In turn, this real rigidity makes the economy prone to involuntary unemployment during external crises. This paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency. First- and second-best monetary and fiscal solutions are analyzed. Second-best solutions are prudential, whereas first-best solutions are not.