The Balassa-Samuelson forecast predicted that Argentina's overvalued exchange rate would have to be offset by:

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The Balassa-Samuelson forecast suggests that a country's exchange rate is determined by the productivity differential between tradable and non-tradable sectors. In the case of Argentina, the overvalued exchange rate was caused by a rise in non-tradable sector productivity, due to an increase in demand for services. This meant that the relative price of non-tradables increased, resulting in inflation and an overvalued exchange rate. To offset this, Argentina would need to engage in a combination of more intense price deflation in non-tradable sectors relative to the United States (which would reduce the relative price of non-tradables and help correct the overvaluation), and an exchange rate depreciation. This would help restore price competitiveness and improve the current account balance. Maintaining a more credible peg to the U.S. dollar would not address the underlying problem of the overvalued exchange rate, intervention by the IMF to stabilize the peso may be helpful but would not address the productivity differences driving the overvaluation, and a trade embargo coupled with capital controls would be a drastic measure with uncertain and potentially damaging consequences.

The Balassa-Samuelson Forecast Predicted That Argentina's Overvalued Exchange Rate Would