The Argentine convertibility regime, where the peso was fixed at parity with the US dollar, ended with a ‘twin crisis’ – a tripling in the price of a dollar and a protracted closure of the entire banking system – accompanied by an economic contraction so severe that it is often referred to as ‘Nuestra gran depresión’. But the government's attempt to imitate President Roosevelt by pesifying dollar loan contracts (while simultaneously protecting dollar depositors) had the effect of destroying bank net worth in the absence of credible compensation. To analyse the macroeconomic effects of credit crunch and currency collapse (and of policies to mitigate them), we turn to a model of crisis, specifically that of Aghion, Bacchetta & Banerjee (2000). Our account, however, combines the supply contraction cause by balance sheet effect with a Keynesian demand contraction due to a domestic credit crunch, exacerbated by unsuccessful resolution of the banking crisis. The latter is analysed as a game of political economy played between government and banks about who pays for the banking crisis induced by default and asymmetric pesification.
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Find related papers by JEL classification: E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers F34 - International Economics - - International Finance - - - International Lending and Debt Problems G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
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Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2002.
"IS-LM-BP in the Pampas,"
NBER Working Papers
9337, National Bureau of Economic Research, Inc.
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