Policy failures played a role in Argentina’s economic collapse. The most important mistake was the fixed exchange rate. But the immediate cause of Argentina’s crisis was a series of external shocks that were beyond its control, beginning with the US Federal Reserve Board’s decision to raise interest rate in February of 1984. The effect of these shocks was much worse than it otherwise would have been because of the fixed exchange rate. But the commonly believed story that the government could not accept a sufficient dose of the painful medicine of austerity, or spent its way into a hole, is not supported by data.

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January 31, 2002.