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Gaucho banking redux

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  • Gerardo della Paolera
  • Alan M. Taylor

Abstract

Argentina's economic crisis has strong similarities with previous crises stretching back to the nineteenth century. A common thread runs through all these crises: the interaction of a weak, undisciplined, or corruptible banking sector, and some other group of conspirators from the public or private sector that hasten its collapse. This pampean propensity for crony finance was dubbed "gaucho banking" more than one hundred years ago. What happens when such a rotten structure interacts with a convertibility plan? We compare the 1929 and 2001 crises-the two instances where rigid convertibility plans failed-and reach two main conclusions. First, a seemingly robust currency-board can be devastated by an ill-conceived approach to the problems of internal and external convertibility (or, to rephrase Gresham, "bad inside money drives out good outside money"). Second, when modern economic orthodoxy collides with caudillo-style institutional backwardness, a desperate regime with its hands tied in both monetary and fiscal domains will be sorely tempted by a "capital levy" on the financial sector (for, as Willie Sutton said when asked why he robbed banks, "because that's where the money is").

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 03-04.

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Date of creation: 2003
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Handle: RePEc:fip:fedfpb:03-04

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Keywords: Argentina;

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References

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  1. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2005. "The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 423-438, August.
  2. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  3. Velasco, Andres, 1987. "Financial crises and balance of payments crises : A simple model of the southern cone experience," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 263-283, October.
  4. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  5. Jeffrey A. Frankel & Sergio L. Schmukler & Luis Serven, 2002. "Global Transmission of Interest Rates: Monetary Independence and Currency Regime," NBER Working Papers 8828, National Bureau of Economic Research, Inc.
  6. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  7. della Paolera, Gerardo & Taylor, Alan M., 2002. "Internal versus external convertibility and emerging-market crises: lessons from Argentine history," Explorations in Economic History, Elsevier, vol. 39(4), pages 357-389, October.
  8. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2004. "Government guarantees and self-fulfilling speculative attacks," Journal of Economic Theory, Elsevier, vol. 119(1), pages 31-63, November.
  9. Michael Mussa, 2002. "Argentina and the Fund: From Triumph to Tragedy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa67.
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Cited by:
  1. Edgardo Barandiarán, 2003. "El Prestamista de Última Instancia en la Nueva Industria Bancaria," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 40(120), pages 337-358.
  2. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2008. "Financial Stability, the Trilemma, and International Reserves," NBER Working Papers 14217, National Bureau of Economic Research, Inc.
  3. Jérôme Sgard, 2004. "Ce qu'on en dit après - le Currency Board argentin et sa fin tragique," Sciences Po publications info:hdl:2441/6827, Sciences Po.
  4. Lopes, José Mário & Nunes, Luis C., 2012. "A Markov regime switching model of crises and contagion: The case of the Iberian countries in the EMS," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1141-1153.
  5. repec:spo:wpecon:info:hdl:2441/6827 is not listed on IDEAS
  6. Jérôme Sgard, 2004. "Ce qu’on en dit après : le « currency board » argentin et sa fin tragique," Revue d'Économie Financière, Programme National Persée, vol. 75(2), pages 129-151.
  7. V. Hugo Juan-Ramon & Emiliano Basco & Carlos Quarracino & Adolfo Barajas, 2006. "Banks During the Argentine Crisis," IMF Working Papers 06/42, International Monetary Fund.

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