Will Turkey & Argentina’s exchange rate policies backfire?

The use of the exchange rate as a nominal anchor for prices – as is currently the case in Turkey and Argentina – has a broadly successful track record in bringing down inflation in the emerging world (particularly in the 1980s and 1990s). But past experience also suggests that this policy choice tends to result in an overvalued real exchange rate, a widening current account deficit and renewed strains in the balance of payments. On balance, Argentina appears more vulnerable than Turkey to this chain of events.