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Great Expectations and Hard Times: The Argentine Convertibility Plan

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  • Sebastian Galiani

    ()

  • Daniel Heymann

    ()

  • Mariano Tommasi

    ()

Abstract

This paper studies the process that led to the Argentine crisis. The analysis concentrates on the sequence of public and private decisions, together with the varying perceptions and policy incentives that motivated them. In the 1990s, Argentina searched for a new growth trend. During much of the period, the behavior of agents seemed to be based on the anticipation that current and future incomes could sustain a value of domestic spending much higher than in the past (in both real and dollar terms). The government was motivated to reinforce those expectations, for signaling and political economy reasons. The monetary regime not only provided a very visible nominal anchor, but also operated as a basic framework for financial contracts, mostly denominated in dollars. Dollar contracting implicitly presumed that the dollar value of incomes would support the servicing of debts. Despite precautionary actions on the part of the government and the private sector, over time, an increasing mass of decisions and contracts came to rely on the sustainability of the real exchange rate. In the late 1990s, exports stopped rising, and the foreign supply of credit tightened. The economy contracted in the face of these constraints, and the solvency of the government was called into question. The financial system was vulnerable both in the event of devaluation and in the event of a (large) deflation-cum-adjustment. Convertibility proved to have very large exit costs, as was implicit in its design and management.

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Bibliographic Info

Article provided by LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION in its journal JOURNAL OF LACEA ECONOMIA.

Volume (Year): (2003)
Issue (Month): ()
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Handle: RePEc:col:000425:008683

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Related research

Keywords: Argentine crisis; public policy ; deflation-cum-adjusment; political economy;

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Cited by:
  1. Mariano Tommasi, 2003. "Crises, institutions politiques et réformes politiques : le bon, le mauvais et l'affreux," Revue d’économie du développement, De Boeck Université, vol. 17(2), pages 49-81.
  2. David McKenzie & Ernesto Schargrodsky, 2005. "Buying Less, But Shopping More: Changes In Consumption Patterns During A Crisis," Business School Working Papers buyinglessshop, Universidad Torcuato Di Tella.
  3. Alvaro Forteza & Mario Tommasi, 2005. "Understanding reform in Latin America," Documentos de Trabajo (working papers) 2205, Department of Economics - dECON.
  4. Guillermo Cruces, 2005. "Income fluctuation, poverty and well-being over time: theory and application to Argentina," LSE Research Online Documents on Economics 6545, London School of Economics and Political Science, LSE Library.
  5. Carlos Scartascini & Mariano Tommasi & Ernesto Stein, 2010. "Veto Players and Policy Trade-Offs- An Intertemporal Approach to Study the Effects of Political Institutions on Policy," Research Department Publications 4660, Inter-American Development Bank, Research Department.
  6. Michael D. Bordo & Agnieszka Markiewicz & Lars Jonung, 2011. "A Fiscal Union for the Euro: Some Lessons from History," NBER Working Papers 17380, National Bureau of Economic Research, Inc.
  7. Daniel Heymann, 2009. "Notes on Varieties of Crises," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(53-54), pages 67-71, January -.
  8. Hansen, Bodil Olai & Keiding, Hans, 2006. "Financial Intermediation, Moral Hazard, And Pareto Inferior Trade," Working Papers 07-2004, Copenhagen Business School, Department of Economics.
  9. Birdsall, Nancy & de la Torre, Augusto & Caicedo, Felipe Valencia, 2010. "The Washington consensus : assessing a damaged brand," Policy Research Working Paper Series 5316, The World Bank.
  10. Mariano Tommasi & Pablo T. Spiller & Ernesto Stein, 2003. "Political Institutions, Policymaking Processes, and Policy Outcomes. An Intertemporal Transactions Framework," Working Papers 59, Universidad de San Andres, Departamento de Economia, revised Jul 2003.

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