Milei's Monetary Tightrope: Argentina Is Caught Between a Crawling Band and Whatever Comes Next

Last Sunday, I left Buenos Aires after spending 40 days. It suffices to say Argentina has been on my mind a lot. I have mostly examined Argentina through an academic public policy lens, but it was intriguing to see firsthand how it is to live there for a bit and to talk with Argentineans about life in Argentina. I knew that Argentina had its problems. It went from being one of the world's most powerful economies to succumbing to a populist and protectionist stranglehold of high taxes, tariffs, corruption, profligate government spending, capital controls, and currency controls. No other country in history went from being an economic powerhouse to middle-income economy the way Argentina did. 

The Challenge Ahead for Milei

I knew that whoever would try to clean up this mess would have their work cut out for them, especially given that President Javier Milei inherited one of the least free economies on the planet. It is not simply a matter of considerable political opposition that has gotten in the way. It is trying to untangle the quagmire of decades of poor economic and monetary policy choices that make it difficult. Bridging the gap between economic theory and implementing policies in practice can be quite tricky, as Milei has found. I realized this was especially the case for Milei's monetary policy. 

Understanding the Crawling Band versus the Fixed Peg

When I was in Argentina, I noticed considerable exchange rate fluctuation. I had to check daily how many pesos a dollar could purchase because it did change that drastically. As I discovered during my time in Buenos Aires, Milei has been implementing what is called a crawling band. A crawling band is an exchange rate system where a currency can fluctuate within a set range (a "band") that shifts gradually over time according to predefined rules or market conditions. The band currently is maintained between 1,000 and 1,400 Argentinean pesos (ARS) to the dollar. The premise is that it combines short-term stability with long-term flexibility. This is supposed to help avoid the shocks of a full float and issues that come with the rigidity of a fixed peg. 

Argentina had implemented a fixed peg prior to this latest crawling band. That fixed peg was unsustainable. The capital controls drained the foreign exchange reserves and incentivized importers and exporters to manipulate invoices, thereby undermining confidence in the system. A crawling band was more aligned to the market, allowed for greater transparency, and increased price signaling.  

Why a Floating Currency Is Ideal

While a crawling band is an improvement over a fixed peg, what bothers me in part is that Milei is a minarchist, which is someone who wants government only to perform the most basic of services. He studied Austrian economics and is quite skeptical of government intervention, especially when it comes to central banks. That is why it is so peculiar that he would go along with a crawling band, which is a form of government interventionism. It makes me wonder if he is abandoning his economic training or he is dealing with a clash of his ideals versus the reality of Argentina's situation. 

Ideally, Argentina would have a free floating peso. After all, a free floating currency is a good metric of a mature, stable economy. A free-floating currency allows market forces to determine the currency's value, providing a transparent signal of economic fundamentals and reducing the distortions caused by artificial pegs or interventions. It also encourages fiscal and monetary discipline, as policymakers cannot rely on fixed exchange rates to mask underlying economic weaknesses.

The problem is that Argentina's economy is neither mature nor stable. Argentina's current economic conditions, which are characterized by high inflation, low foreign reserves, persistent fiscal deficits, and weak institutional credibility, make a pure free-floating peso highly vulnerable to sharp devaluations and financial instability. A free float right now could trigger severe exchange rate volatility, capital flight, and a worsening of the current account.

That is not mere speculation. From 1991 to 2001, Argentina had pegged the peso 1:1 to the U.S. dollar. Fiscal deficits and a recession made the peg unsustainable. When the peg was abandoned, the peso plummeted and lost about 75 percent of its value in a matter of months. Hyperinflation and social unrest followed. I would not be the least bit surprised if this recent history has influenced Milei's decision to implement a crawling band. 

Lessons From Other Economies Liberalizing Currency Too Soon

Argentina is not the only country that felt pain after transitioning to a free-floating currency too quickly. In 1998, Russia allowed its ruble to free float in response to fiscal crisis. As a result, the ruble lost 70 percent of its value and inflation spiked. Prior to October 2008, Iceland had a managed float system tied to inflation targeting. Because Iceland had large foreign liabilities and small foreign reserves, its banking system collapsed and Iceland had to free float its krónur. In a matter of a few weeks, the krónur's value dropped by half and inflation surged. In 2018, Venezuela also tried to allow for floating mechanisms amid hyperinflation. However, it made matters worse. 

The takeaway here should not be that floating exchange rate systems are bad. On the contrary! A country that can manage a floating exchange rate system can handle the volatility and absorb the shocks that comes with letting the currency freely move. That is because such economies have the fundamentals to do so, whether that is a credible monetary policy; a sound fiscal policy; deep and liquid financial markets; or public and investor trust. 

Skepticism Behind Argentina's Crawling Band

The case studies above show a few commonalities with why their transition to a floating exchange rate system went awry, whether it was weak fiscal conditions, limited reserves, poor institutional credibility, or sheer panic. Argentina's current plight has such conditions. As of August, Argentina had about $33 billion in foreign reserves. In February, BNP Paribas estimated that Argentina would need about an extra $11-20 billion before the October elections to be able to lift the exchange controls. While the recent currency swap could help improve Argentina's reserves, I remain skeptical that it would be adequate to get Argentina off the crawling band:

• If the exchange rate approaches or exceeds the band in place, the central bank needs to use foreign reserves to defend the peso. Things seem to be improving, but as Argentinean economic history shows, that could change in a heartbeat. 
• Argentina still has an external financing gap of $15.2 billion. While Milei has done a good job of fiscal consolidation by reducing deficits, there is a question of whether it is sustainable, whether due to political opposition or social unrest. The midterm elections on Sunday suggest that Milei is on to something, but knowing Argentina, that could change. 
• The currency swap does not address the real exchange rate misalignment. In February, the central bank set the crawling peg at 1 percent per month. However, inflation in 2024 was 2.7 percent per month. That is a significant improvement from what it was before, but it still creates a gap. As long as domestic inflation outpaces the crawl of the peso, it will hurt export competitiveness while worsening the current account, which echo some of the unintended consequences that the Competitive Enterprise Institute warns about with such currency manipulation. Without addressing this gap, the currency swap is a temporary fix. 

As the Cato Institute illustrates in its criticism of the crawling band, when the gradual depreciation lags behind the inflation, it mirrors similar structural issues that resulted in the 1994 Mexican peso crisis and the 1997 Asian financial crisis. This could be more problematic if the currency swap does not go through or is discontinued. With this hybrid regime, speculators know the direction of the currency adjustment, which creates greater speculation. This expectation of a sharper devaluation encourages capital flight, which forces the central bank to use more reserves. This both undermines the stabilization effort and heightens the risk it was meant to prevent.  

Milei Needs an Exit Strategy

Here is my other issue with Milei's crawling band. The crawling band is often seen as a transitory regime. But what is Milei transitioning towards? Is it a free-floating peso? Is it dollarization? Is it a fixed regime? Milei's lack of an exit strategy plan makes the transitionary regime seem temporary. Investors are attuned to that lack of a plan, and as such make investors weary of investing in Argentina. Since there is not a rules-based adjustment system in Argentina, it can be viewed as a political tool rather than a credible anchor to lead towards long-term growth. Without a clear strategy, markets are not going to have enough confidence in Argentina. As the Peterson Institute for International Economics points out, a substantial currency swap line without deeper reforms will unlikely save the peso in the long-run. 

An Endgame That Could Work

As stated above, a free-floating system would be ideal. It allows market forces to set prices, it signals economic fundamentals, and it incentivizes monetary and fiscal discipline. Conversely, Argentina's structural weaknesses would make a full floating peso risky in the short run, much as history has taught us. While imperfect and prone to amplifying risks if mismanaged, it is the most viable mechanism in the short-run. My ultimate personal preference is a free-floating currency, but only when the Argentinean economy is ready for it, which it currently is not. 

Milei's crawling band could be seen as a short-term pragmatic compromise towards dollarization or ultimately a floating currency. It could be argued that markets need some gentle guiding in the short-run to reach long-term liberalization. That being said, the Milei regime needs to make the transitional crawling band head towards a credible currency system if he has any chance of a liberalized currency system to work. 

Milei could announce fiscal rules around spending limits or deficit caps. A published widening schedule or intervention triggers could improve transparency, thereby improving market confidence. Such monetary rules as a base money growth ceiling or inflation targeting paths could also help. Adhering to rules would improve institutional credibility. So would cutting public sector largesse, eliminating distortive subsidies, publishing public accounts, or ending the monetization of deficits because it signals to the markets that Argentina is breaking cycles of its dysfunctional past instead of doing it for optics' sake. Without reserves, fiscal anchors, institutional credibility, or a rules-based endgame towards a more liberalized currency regime, Milei's half measures would most likely send Argentina into more economic chaos.