CGD trap
economic problem faced by ldcs. the problem occurs when the country tries to stimulate fdi by establishing a hard peg of its currency to that of another country (usually the us dollar). initially, the plan may work very well, but then, as capital flows in, growth prospects deteriorate rapidly because the local currency is so strong its exports are not compet-tive. the country’s growth slows down, and external debt soars. the government is stuck trying to defend the currency on international markets, a battle it is nearly always doomed to loose.
term was coined by de la torre, levy yeyati, and schmukler in “living and dying with hard pegs: the rise and fall of argentina’s currency board,” -economia-, spring, pp. 43-107
right from the beginning of the de la rúa administration (which -ssumed power in december 1999), the argentine economy was caught in a cgd trap. the currency was overvalued, growth was faltering, and the debt was hard to service.
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