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International Borrowing and Macroeconomic Performance in Argentina

In: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences

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  • Kathryn M. E. Dominguez
  • Linda L. Tesar

Abstract

This paper provides an overview of the major economic events in Argentina from the adoption of the convertibility plan in 1991 to the collapse of the exchange rate regime in 2001. We focus on the relationship between the credibility of the currency board and capital flows, and the inescapable link between fiscal and monetary policy. Argentina inadvertently entered into a vicious circle with financial markets – one in which it felt compelled to raise the exit costs from the currency board in order to maintain the regime’s credibility. As exit costs mounted, financial markets became increasingly concerned about the dire implications of a devaluation, which in turn, compelled the government to raise exit costs further. In the late 1990s, when Argentina went into recession, it required some sort of stimulus –either a loosening of monetary policy (i.e. a devaluation) or fiscal stimulus. But either way spelled disaster. The added pressure of capital outflow, first by international investors and then the withdrawal of deposits from the Argentine banking system, eventually tipped the scales.

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This chapter was published in:

  • Sebastian Edwards, 2007. "Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences," NBER Books, National Bureau of Economic Research, Inc, number edwa06-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0156.

    Handle: RePEc:nbr:nberch:0156

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    1. Sebastian Galiani & Eduardo Levy Yeyati & Ernesto Schargrodsky, 2003. "Financial Dollarization and Debt Deflation under a Currency Board," Working Papers 64, Universidad de San Andres, Departamento de Economia, revised Nov 2003.
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    22. Sebastian Auguste & Kathryn M.E. Dominguez & Herman Kamil & Linda L. Tesar, 2002. "Cross-Border Trading as a Mechanism for Capital Flight: ADRs and the Argentine Crisis," NBER Working Papers 9343, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Agarwal, Sumit & Chomsisengphet, Souphala & Hassler, Olivier, 2005. "The impact of the 2001 financial crisis and the economic policy responses on the Argentine mortgage market," Journal of Housing Economics, Elsevier, vol. 14(3), pages 242-270, September.
    2. Todd Keister & Huberto M. Ennis, 2007. "Commitment and Equilibrium Bank Runs," 2007 Meeting Papers 509, Society for Economic Dynamics.
    3. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," NBER Working Papers 14691, National Bureau of Economic Research, Inc.
    4. Maltritz, Dominik & Eichler, Stefan, 2010. "Currency crisis prediction using ADR market data: An options-based approach," International Journal of Forecasting, Elsevier, vol. 26(4), pages 858-884, October.
    5. Neil R. Ericsson & Steven B. Kamin, 2008. "Constructive data mining: modeling Argentine broad money demand," International Finance Discussion Papers 943, Board of Governors of the Federal Reserve System (U.S.).

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