Central-Bank ‘Distress’ and Hyperinflation in Argentina, 1989–90

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Abstract
The essential explanation of Argentina's 1989 hyperinflations is that the stabilisation programmes immediately preceding them drove the public sector in particular, the central bank – into ‘debt distress.’ These stabilisation programmes sought to anchor prices on an appreciated exchange rate, sustained by tight monetary policies that maintained high interest rates. The problem was that the government and the central bank had heavy domestic-debt burdens, and their combined interest bill far exceeded their non-interest surplus. To finance the interest without creating money, the government and central bank had to add continually to the outstanding debt stock as they capitalised the interest due. The debt swelled, and interest rates were pressured upward. Heavy pressure against the exchange rate, devaluation and hyperinflation then ensued when the public-sector debt stock exceeded what financial markets could be persuaded to hold at reasonable interest rates.

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