Fiscal and monetary policy challenges after COVID-19: The Argentinean case

This chapter studies the connection of monetary policy with capital markets in Argentina and its implications for the real side of the economy. After the sudden stop observed in Argentina in 2018, there had been several fundamental changes in the design of economic policy, especially after the 2019 national election, which implied a turnover in the ruling party. These changes have major implications for the relative behavior of Argentina with respect to other middle-income countries. The first important measure of President Fernández’s administration was a sobering debt swap, which implied a reduction in the burden associated with dollar-denominated debt, but was followed by a sharp drop in the price of bonds. Even in the context of zero interest rates around the world, this juncture precludes debt issuances. In this context, COVID-19 forced the government to restrict the mobility of citizens, which implied the need for an unprecedented monetary and fiscal stimulus. Thus, now, the Argentinean economy has misalignments in relative prices and liquidity levels with the banking sector that significantly increased its exposure to the issuance of the public sector. These facts can be explained by the presence of capital controls and the absence of a monetary program. Due to the financing needs implied by the stimulus associated with COVID-19, there was an impressive jump in the transfers from the Central Bank to the Treasury, with a minor impact on the money base, affecting the balance sheets of banks. Coupled with the implications of the debt swap, the government now faces important restrictions when it comes to financing the fiscal deficit. Due to capital controls, the foreign exchange premium jumped. The lack of access of the public sector to non-monetary financing sources and the mentioned premium generated a misalignment in inflation expectations, which severely affected the stance of monetary policy to fight inflation. On top of that, the previous administration received an unprecedented loan from the International Monetary Fund in the context of a Stand-By program. Now, the current administration must renegotiate the loan under a new type of program, which implies long-term commitments. This macroeconomic outlook implies that Argentina constitutes a unique case among modern middle-income countries as it combines a persistent moderate inflation regime, capital controls, high deficits, and volatility of relative prices. These facts are rarely observed in comparable countries, thus motivating Argentina as a case study, especially in a zero-interest-rate world. The objective of this chapter is to better understand the current Argentinean situation and to make some policy recommendations aimed at improving the macroeconomic outlook of the country.