Devaluation Beliefs and Debt Crisis: The Argentinian Case
AbstractThroughout the year 2001 the Argentine real GDP fell by 20 percent and the Investment Rate decreased by more than 20 percent of the GDP. The government made several announcements on changes in exchange rate policy in order to assist the recovery of the economy. At same time, the Trade Balance produced a huge surplus and the Argentine External Debt over GDP ratio increased so much that it forced the Argentinian government to default and, afterwards, devalue the peso 40 percent. We explore the relationship between default and the expectations on devaluation. We find that depending on the level of debt and given an expectation of devaluation two types of crises can arise: if the level of debt is low the government devalues but does not default; for a higher level of debt, the government devalues and defaults to cancel the future cost of repaying the debt. We have calibrated our model to match the main features of the Argentine crisis and we show that the External Debt over GDP ratio was in a crisis zone where the government found it optimal to default and to devalue.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2004/09.
Length: 50 pages
Date of creation: 2004
Date of revision:
Debt crisis; Devaluation; Argentina;
Find related papers by JEL classification:
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F3 - International Economics - - International Finance
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cole, Harold L & Kehoe, Timothy J, 2000.
"Self-Fulfilling Debt Crises,"
Review of Economic Studies,
Wiley Blackwell, vol. 67(1), pages 91-116, January.
- Finn E. Kydland & Carlos E. J. M. Zarazaga, 2002.
"Online Appendix to Argentina's Lost Decade and the Subsequent Recovery Puzzle,"
kydland02, Review of Economic Dynamics.
- Finn E. Kydland & Carlos E.J.M. Zarazaga, 2001.
"Argentina's lost decade,"
Center for Latin America Working Papers
0401, Federal Reserve Bank of Dallas.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Teresa Rodríguez).
If references are entirely missing, you can add them using this form.