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%u2019s 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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11353.
Length: Date of creation: May 2005 Date of revision: Handle: RePEc:nbr:nberwo:11353
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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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