After the Mexican devaluation, investors questioning Argentina’s ability to maintain currency convertibility began pulling their money out of Argentina. In response, the Argentine government took extraordinary steps to maintain its exchange rate at $1 per peso.

a. What were the likely consequences of this capital flight for Argentina’s peso money supply? For Argentine peso interest rates? For economic growth?

b. Why was the Argentine government so reluctant to devalue the peso?

c. As U.S. interest rates rise, what is likely to happen to Argentine rates? Why?