Where relative prices cannot change through exchange rate adjustment, domestic prices must adapt.3 Even super-flexible Hong Kong has found this hard, with GDP falls as large as Korea’s during the Asian crisis.
Argentina’s choice of a strong fix may well be correct policy, but it is clearly painful.4 If the fixed end of the spectrum does not facilitate the sorts of adjustment which the underlying fundamental may require, then the free float end of the spectrum may well deliver much more variability than the fundamentals require.