Core determinants of the dynamics of a currency board. The fragility behind the peg

In this research, we study a 2×2 dynamical model for a currency board, where the growth of domestic liquidity is strictly governed by the dynamics of foreign reserves, i.e., the balance of payments. We refer to Argentina’s experience and employ a nonlinear continuous-time model to obtain more precise coefficients in terms of both efficiency of estimations and speed of convergence. In our dynamic setting, expectations of a blooming economic growth foster debt-generating capital inflows; this, in turn, determines the build-up of debt, which curbs agents’ state of confidence.