Argentina’s disinflation problem is not what you think

The puzzle that keeps repeating

Argentina has tried to stabilize its economy before. It has done so under military governments and democratic ones, under heterodox programs and orthodox ones, under economists who believed in markets and politicians who did not. Each episode produced a period of relative calm. Each period eventually ended the same way. If the problem were simply bad policy or incompetent technocrats, one would expect at least one of these attempts to stick. The fact that none has should prompt a harder question: what if the obstacle is not the policy, but the institutional environment in which any policy must operate?

This question is not new. The Argentine legal theorist Carlos Santiago Nino asked a version of it decades ago, and his answer remains unsettling. In Un País al Margen de la Ley (1992), Nino argued that Argentina’s deepest problem is what he called anomia—a civilizational disconnect between formal rules and actual behavior. Laws are passed but not internalized as binding. Constitutions are written and then rewritten, but neither version is treated as a genuine constraint on power. Contracts are signed with one eye already on the escape clause. This is not, Nino insisted, a feature of any particular government or ideology. It is a property of Argentine society as a whole, embedded across decades of experience in which rule-breaking was routinely rewarded, and rule-following was often punished. The anomie is so deep that not even the government follows its own laws. This institutional sickness has important implications for monetary policy.

A central bank can only deliver lasting price stability if economic agents genuinely believe it will do so. This is not a trivial requirement. It means that households setting wages, firms setting prices, and investors allocating capital must all form the expectation that the monetary authority will resist political pressure to inflate—not just today, but over the relevant planning horizon. When that expectation is present, the central bank’s job is easier: inflation expectations anchor, wage-price spirals become less likely, and the real cost of disinflation falls. When it is absent, the central bank must fight not only current inflation but also the widespread anticipation of future inflation baked into every contract and every asset price in the economy.

Building that credibility requires more than a well-designed central bank statute. It requires that agents believe the statute will actually be respected—that when a future government faces a financing crisis, it will not simply override the monetary authority, as Argentine governments have repeatedly done. That belief, in turn, depends on the broader institutional environment. A country where formal rules are routinely bent to accommodate political necessity cannot manufacture monetary credibility through institutional design alone. The credibility of any peso-based regime is ultimately only as strong as Argentina’s political institutions, and the country’s reality offers little comfort on that front.

The most instructive episode in Argentina’s recent monetary history is the one that actually worked… for a while. The Convertibility Plan of 1991 pegged the peso one-to-one to the dollar and backed it with a currency board arrangement that severely restricted the central bank’s ability to print money. Inflation, which had reached hyperinflationary levels, collapsed. For most of the 1990s, Argentina enjoyed price stability that would have seemed unimaginable just years earlier.

Why did it work when so many other programs had not? The answer is precisely that convertibility substituted an external credible currency for domestic institutional credibility. Economic agents did not need to trust Argentine policymakers or Argentine institutions—they needed to trust the dollar, which they did. The peso inherited credibility it could not have generated on its own, as long as the convertibility plan was credible itself. The currency board was, in Nino’s terms, a workaround for anomie: it took the question of monetary discretion largely off the table by importing a credible constraint from outside the domestic institutional environment.

What the 2001 crisis then demonstrated is equally instructive. The collapse of convertibility did not merely end the convertibility regime. It destroyed whatever residual credibility the peso might have carried into future arrangements. The images of bank runs, frozen deposits, and a government unilaterally breaking its own contracts—the corralito, the pesification of dollar-denominated savings—became part of Argentina’s institutional memory in a way that cannot simply be legislated away. Any future peso-based regime inherits not only the general problem of anomie but the specific, living memory of what happened last time Argentines trusted a domestic monetary arrangement.

This institutional background helps make sense of what is happening right now—and why the current disinflation, whatever its eventual trajectory, faces a structural ceiling that monetary policy alone cannot raise.

The Milei administration’s disinflation effort has been more serious and more technically disciplined than many of its predecessors. The fiscal adjustment has been genuine and substantial, even though questions about its accounting accuracy are serious. As much as inflation rates fell, they still have a significant way to go before reaching “standard” levels. Yet inflation rose for the last nine consecutive months. This is a troubling reversal as the new electoral cycle approaches. None of this is surprising from an institutional perspective. But there is a more specific mechanism worth understanding, one that connects Nino’s anomie thesis to the concrete vulnerabilities of the current arrangement.

A currency with no genuine demand—meaning one that agents hold only because it is temporarily profitable to do so, not because they trust it as a store of value—cannot sustain disinflation through normal channels. In Argentina’s case, the current exchange rate stability reflects in significant part a carry trade dynamic: investors borrow in dollars, convert to pesos, and earn high peso-denominated returns while the crawling peg keeps the exchange rate predictable. This generates dollar inflows, which support the exchange rate and make the inflation numbers look better in the short run. The problem is the logic of the exit. When carry trade conditions shift—when returns fall, when risk appetite changes, or when electoral uncertainty rises—the reversal can be sharp. The very stability that the carry trade produces is a form of borrowed time, not a reflection of genuine monetary credibility. Argentina has been here before. The sequencing—apparent calm, capital inflow, growing vulnerability, sudden correction—is a recurring feature of its monetary history, not an accident.

A currency that agents hold only for yield, never for trust, offers no escape from this dynamic — and for a country whose institutional history makes credibility so difficult to manufacture, that trap is not a temporary condition.

A common critique against official dollarization of Argentina runs something like this: inflation is coming down, the program is working, and adopting the dollar would mean permanently surrendering monetary policy flexibility for a problem that is already being solved. The objection, in other words, treats a lower inflation rate as evidence that the underlying credibility problem has been solved — a conclusion that does not follow from the data and that Nino’s analysis would reject on institutional grounds. The argument in favor of dollarization is deeper than dollarization being a better second-best monetary policy than what the Argentine central bank can deliver. The case for dollarization was never primarily that Argentina’s central bank was technically incompetent, or that disinflation was impossible. It was that durable price stability requires a level of institutional credibility that Argentina cannot generate endogenously, and that dollarization is the only monetary arrangement capable of substituting for that missing credibility.

Nothing in the current disinflation resolves that underlying problem. A successful reduction in inflation from its recent peak would be a genuine achievement. It would not rebuild the institutional trust destroyed in 2001. It would not alter the anomie dynamic Nino described. It would not eliminate the carry trade vulnerability or insulate the next government from the same political incentives that have undermined previous stabilization programs. The case for dollarization survives not because the current effort is failing, but because the problem it addresses is structural rather than conjunctural. A lower inflation rate is not the same thing as a credible monetary regime.

This post was written with the assistance of Claude (Anthropic). The material was originally published here: https://economicorder.substack.com/p/argentinas-disinflation-problem-is