Q: As a close observer of Argentina’s economy, you have seen the ups-and-downs of President Mauricio Macri’s efforts to rescue Argentina from its chronically high inflation and volatile growth. Last year, the country fell into a deep recession after creditors pulled out of Argentina, leaving its government without affordable financing for its large fiscal deficit and forcing it into the arms of the International Monetary Fund. The downturn erased all growth under Mr. Macri. Some blame Argentina’s recent struggles on Mr. Macri’s gradualismo, and say he could have avoided last year’s crisis by frontloading austerity.

Do you agree? Though that view is increasingly popular, wasn’t Wall Street generally comfortable with gradualismo before the Fed began raising interest rates last year?

A: It is easy to argue that President Mauricio Macri should have frontloaded austerity from a purely economic vantage point. However, it was not politically viable in my opinion. Mr. Macri had no majorities in congress. He also carried with him the intrinsic pressure that no non-Peronist president has finished his or her term since Argentina’s return to democracy in 1982. Because of those reasons, I do not think gradualismo was a mistake. That being said, I do think the Macri administration has made some critical mistakes that either helped cause, or exacerbated, the current economic crisis. The first – and arguably, most important – error was sugarcoating the administration’s inheritance. No one is denying that the economic policies of Cristina Fernandez de Kirchner are partially the cause of the Macri administration’s shortcomings, yet Mr. Macri should have clearly explained Argentina’s economic state during his first month in office. Bringing up the inheritance in a piecemeal, overly optimistic way did not resonate with Argentines. The second mistake was undermining the central bank’s independence on December 28, 2017. On that day, Treasury Minister Nicolás Dujovne announced different (i.e., higher) inflation targets than the central bank’s. That raised doubts about the central bank’s autonomy, influencing its decision to cut interest rates prematurely and stoking inflation, which was one of the main domestic causes of the first peso crash last May.

Q: Inflation data for the first three months of this year has sent Argentine authorities into a panic – both because of the scale of the problem and the political consequences in an election year. To mitigate the political costs, Mr. Macri has imposed supposedly voluntary price controls and frozen utility prices. Are you surprised Argentina’s tight monetary policy, sky-high interest rates and economic recession are not enough to tackle inflation? Are the latest measures – reminiscent of former President Cristina Fernández de Kirchner’s economic management – tarnishing Mr. Macri’s reformist brand with investors?

A: No, I’m not surprised, because the two main problems have been outside of the central bank’s control. The first issue is that the central bank cannot intervene in foreign exchange markets – this leaves the value of the peso at the mercy of the market. The second factor is that the government is cutting expenditures by reducing subsidies. Raising these utility and transportation prices has stoked inflation in 2019. (It is ironic, because overspending is traditionally the root cause of Argentina’s chronic inflation.)

The price freezing measures recently announced by Mr. Macri are straight out of the Peronist playbook. Despite a somewhat positive short-term effect on inflation, I doubt this will make a significant electoral impact. Furthermore, it just kicks the inflation problem down the road.

Q: To husband Argentina’s central bank reserves, Argentina’s IMF program limits intervention in the currency market. Its new IMF deal means the central bank cannot defend the currency outside of pre-established currency bands; instead, the new monetary regime relies upon traditional monetary tools like controlling the monetary base and high interest rates. Some analysts have questioned that policy, noting that peso depreciation is highly inflationary in Argentina’s highly dollarized economy. Should Argentina have agreed to the hands-off approach?

A: The primary objective of this monetary policy was to restore the transparency and credibility of the central bank. However, cracks in the policy have emerged. In my opinion, the central bank should have pressed the IMF for a tighter band. The difference between the lower band and the upper band is around 30 percent, which is an enormous movement in the peso before the central bank can do anything. As a result, the monetary authority must resort to extortionately high interest rates and zero monetary base growth. Both orthodox policies are welcome. However, this form of monetary policy is so tight it will prolong Argentina’s recession, which is counterproductive if the IMF expects Argentina to generate enough tax revenue to hit its zero fiscal deficit target. I do believe the central bank should push harder to have greater intervention in the FX markets, which would likely come in the form of a much narrower “non-intervention” zone.

Q: Ms. Fernández de Kirchner’s poll numbers keep on rising, as is Argentina’s country risk. Why are investors so afraid of a third Fernández de Kirchner term?

A: The Macri administration has spent almost all its energy unwinding the economic and market distortions left behind by the Kirchner administration. Investors presume that Ms. Fernández de Kirchner would reintroduce all of those distortions (e.g., capital controls, limited access to hard currency, etc.), while doubling down on confrontational rhetoric with the opposition and the United States. In all likelihood, Argentina would also default on its sovereign debt.

Overall, anti-Kirchner Argentines and foreign investors fear that her re-election could put Argentina on the same road as Venezuela. And that is not a hyperbole.