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Currency Board and Debt Trap: Evidence from Argentina and Relevance for Estonia

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  • Francois Gurtner
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    Abstract

    This paper analyses the November 2000 liquidity crisis that brought Argentina near default on its foreign debt. The main purpose of this paper is to assess whether this crisis may be taken as a warning signal for Estonia, given the similar exchange-rate system shared by the two countries. It seems that with a low level of public debt and a balanced budget, Estonia will not face a similar liquidity crisis as its Latin American counterpart, which remained heavily reliant on foreign borrowings. But the substantial real exchange-rate appreciation of the kroon under the Currency-Board Arrangement has resulted into serious external imbalances, which will need to be corrected to avoid balance of payments pressure and reduce Estonia’s high dependency on the level of foreign direct investments. Classification-JEL:

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    File URL: http://www.sml.hw.ac.uk/downloads/cert/wpa/2002/dp0204.pdf
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    Bibliographic Info

    Paper provided by Centre for Economic Reform and Transformation, Heriot Watt University in its series CERT Discussion Papers with number 0204.

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    Date of creation: 2002
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    Handle: RePEc:hwe:certdp:0204

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    Keywords: Argentina; balance of payments crisis; Currency Board Arrangment; Estonia; transition;

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    1. C Grafe & C Wyplosz, 1998. "The Real Exchange Rate in Transition Economies," CEP Discussion Papers dp0395, Centre for Economic Performance, LSE.
    2. Panagiotis Liargovas, 1999. "An Assessment of Real Exchange Rate Movements in the Transition Economies of Central and Eastern Europe," Post-Communist Economies, Taylor and Francis Journals, vol. 11(3), pages 299-318.
    3. Sachs, Jeffrey D, 1996. "Economic Transition and the Exchange-Rate Regime," American Economic Review, American Economic Association, vol. 86(2), pages 147-52, May.
    4. Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
    5. Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Journal of Development Economics, Elsevier, vol. 66(2), pages 415-444, December.
    6. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
    7. International Monetary Fund, 2001. "Interpreting Real Exchange Rate Movements in Transition Countries," IMF Working Papers 01/56, International Monetary Fund.
    8. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings, Federal Reserve Bank of Kansas City, pages 329-368.
    9. International Monetary Fund, 2001. "Argentina: Second Review Under the Stand-By Arrangement and Request for Augmentation-Staff Report; Staff Statement; Press Release on the Executive Board Discussion," IMF Staff Country Reports 01/26, International Monetary Fund.
    10. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, 1st quart.
    11. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals - A Methodological Comparison of BEERs and FEERs," IMF Working Papers 98/67, International Monetary Fund.
    12. Nada Choueiri & Graciela Laura Kaminsky, 1999. "Has the Nature of Crises Changed? A Quarter Century of Currency Crises in Argentina," IMF Working Papers 99/152, International Monetary Fund.
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