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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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File URL: http://fordschool.umich.edu/rsie/workingpapers/Papers526-550/r532.pdf
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Bibliographic Info

Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 532.

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Length: 45 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:mie:wpaper:532

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Postal: ANN ARBOR MICHIGAN 48109
Web page: http://www.fordschool.umich.edu/rsie/
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Find related papers by JEL classification:

• O54 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
• F3 - International Economics - - International Finance
• F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
• F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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Cited by:

1. Todd Keister & Huberto M. Ennis, 2007. "Commitment and Equilibrium Bank Runs," 2007 Meeting Papers 509, Society for Economic Dynamics.
   
   • Huberto M. Ennis & Todd Keister, 2007. "Commitment and equilibrium bank runs," Staff Reports 274, Federal Reserve Bank of New York.
2. 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.
3. 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.
4. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," NBER Working Papers 14691, National Bureau of Economic Research, Inc.
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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