The executive branch is making more and more mistakes

BCRA President Santiago Bausili announced a change in the exchange rate system and monetary policy as of January 1, 2026. On the exchange rate side, the bands of the exchange rate system are switched from a monthly movement of 1% to an adjustment to the retail inflation of the CPI index of the previous two months. On the monetary policy side, the “non-issuance” policy, non-accumulation of reserves and monetary shortage are abolished and instead the issuance of monetary base to accumulate reserves and remonetization of the economy through credit incentives through “normalization” of reserve requirements are introduced.

According to the official view, the fact that the bands are adjusted for inflation does not mean that the exchange rate cap will permanently increase by more than the current monthly 1%, nor that the exchange rate will trade above this band on time. The first will depend on inflation, and if it falls below 1.0% monthly, the range would adjust less than it does now. The second will depend on the demand and supply of currencies. Specifically, a higher net supply of foreign currencies could result in the exchange rate being “comfortably” below the upper limit. As far as monetary policy is concerned, the remonetization of the economy would not be inflationary for the government because both the accumulation of reserves and the associated expansion of the monetary base and the remonetization of the economy and the expansion of credit with the resulting growth of M1, M2 and M3 would occur in response to an increase in the demand for money.

In fact, in its official monetary policy statement, the BCRA pays homage to money demand by claiming that it is very solid and has grown solidly in the past and will continue to grow steadily in the future, and that, on the contrary, it has only been slightly weakened by the “Kuka” political risk. Specifically, the monetary authority claims that the “collapse” in inflation (year-on-year) from 290% (April 24) to 31% (November 25) was due to the increase in money demand, which at the same time allowed a real increase in all monetary aggregates: the monetary base from 2.7% to 4.2% of GDP, M3 from 14.5% to 16.7% of GDP and credit 4.2% to 9.0% of GDP. However, the BCRA claims that from April 25 there was a shock of political instability that potentially caused the demand for money to collapse and triggered an unprecedented episode of portfolio dollarization and exchange rate hedging. Consequently, the Monetary Authority believes that this decline in money demand will not be repeated and that all conditions are in place to remonetize the economy in the future and accumulate reserves without generating inflationary pressure, since historically the monetary base has always been twice the current value and has fluctuated between 8.0% and 9.0% of GDP.

In short, borrowing from Austrian economics, one could say that the BCRA’s new monetary program is based on two gross intellectual errors by its bureaucrats: i) the assumption that they know the future timing of money demand and; ii) Assume that their levels have been balanced in the past and will continue to be so in the future. First, the Austrian school explains in detail and consistently that the demand for money cannot be known because it is based on individual subjective evaluations and is constantly changing. Who dares to say exactly how much money an individual is willing to spend on economic transactions and how much he would like to save? Secondly, the Austrians also explain that in a fractional reserve system, central banks do not precisely control the money supply (M1, M2 and M3) because banks also issue money through financial intermediation. In this way, in the current monetary system, without controlling supply and without knowing demand, there is always an excess supply of money and; hence inflation. Second, Mises, Hayek, Rothbard, JHS, and Hans Hermann Hoppe also explain that the levels of monetary aggregates in the past are indicative of the levels of future aggregates because markets are dynamic and constantly changing. There are innovations, institutional changes, technological advances, other economic actors change their preferences and therefore; Both supply and demand change and consequently neither the quantities exchanged nor their prices can remain the same. Ergo, a past equilibrium situation is most likely not another future equilibrium situation. It applies to every market, including the money market.

Everything explained in the previous paragraph applies even more to the Argentine case. The demand for money consists of two parts: the demand for money for transaction reasons and the demand for money for storage reasons, which is nothing other than the demand for money for saving (future consumption). First, the demand for money based on savings does not exist permanently in our country, since Argentines have never saved in pesos and will not do so. This means that “half” of the demand for money does not exist in Argentina in the long term. Every time we Argentinians save in dollars, there is an immediate oversupply of demand (supply) in the foreign exchange (money market), which initially leads to an increase in the dollar and then gradually to inflation. Second, transactional money demand is tied to potential GDP in the long term, which in Argentina has an approximate growth rate of about 0.5% per year due to decades of low investment and capital destruction over the last 15 years. In fact, the EMAE index (seasonally adjusted) shows that there is an activity ceiling of around 150/154 points with peaks in 2013, 2015, 2017, 2022 and 2025, which cannot be broken sustainably. In other words, Argentina does not have a transaction-based money demand that can grow sustainably in the long term. Third, assuming that the previous average GDP level of any monetary aggregate (basis: M1, M2 and M3) is “okay” is a serious error that will lead to inflation, since Argentina has had double and triple digit annual inflation for more than 50 years. In short, any past average of the monetary base M1, M2 or M3 indicates an excess money supply that has led to high inflation.

This scenario assumes that money demand in Argentina is still much more unknown, unpredictable and volatile than in any other economy. At the same time, it is also believed that basing future monetary policy on the past could be a more serious mistake in Argentina than in other economies. In this way, it is impossible to permanently balance the supply and demand of money in our country, as a result of which oversupply, exchange rate problems and inflation will occur systematically and repeatedly. Milei, Caputo and Bausili’s BCRA wants to try to do what almost everyone has tried to do in the past: an effective expansionary monetary policy that stimulates activity levels in the short term but controls and/or reduces inflation. Nothing new. Even without independence, without credibility, reputation or rules. As usual. In this sense, it is enough to recall that the current government has already changed its monetary and exchange rate policies four times in just two years. President Javier Milei has reached an impasse, as we have been saying for more than a year. Politics devoured him like a pack of hyenas swallowed an old lion. The BCRA had to be closed and the peso destroyed, but PEN obeyed its voters by aligning itself with politicians and the financial system. Further proof that elected politicians are not representatives and that there is no contract to be kept between politicians and the people.

* Holder of the E2 (Economy & Ethics) and professor at the FCE of the UBA.