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Missed Expectations: The Argentine Convertibility

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  • Sebastian Galiani

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  • Daniel Heymann
  • Mariano Tommasi

Abstract

This paper studies the process that led to the Argentine crisis. The crisis is understood as a major disappointment of previous expectations, indicated by widespread insolvencies and abrupt declines in consumption. The analysis concentrates on the sequence of public and private decisions, and the varying perceptions and policy incentives that motivated them. In the nineties Argentina searched for a new growth trend. During much of the period, the behavior of agents seemed to be based on the anticipation that current and future incomes could sustain a value of domestic spending much higher than in the past. The government was motivated to reinforce those expectations, for signaling and political economy reasons. The convertibility monetary regime not only provided a very visible nominal anchor, but also operated as a basic framework for financial contracts, mostly denominated in dollars. Dollar contracting implicitly presumed that the dollar value of incomes would support the servicing of debts. Despite precautionary measures, the reliance on the sustainability of the real exchange rate increased over time. In the late nineties exports stopped rising and the foreign supply of credit tightened. Facing these contraints, the economy contracted and the solvency of the government was put into question. The financial system was vulnerable both in the event of devaluation and that of a (large) deflation-cum-adjustment. As was implicit in its design and management, convertibility proved to have very large exit costs.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 515.

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Length: 37 pages
Date of creation: 01 Nov 2002
Date of revision:
Handle: RePEc:wdi:papers:2002-515

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Keywords: Economic Crisis; Contracts; Convertibility and Wealth Perceptions;

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  1. Daniel Heymann, 1994. "Sobre la interpretación de la cuenta corriente," Economia Mexicana NUEVA EPOCA, , vol. 0(1), pages 31-59, January-J.
  2. Mariano Tommasi & Pablo T. Spiller, 2000. "The Institutional Foundations of Public Policy: A Transactions Approach with Application to Argentina," Working Papers, Universidad de San Andres, Departamento de Economia 29, Universidad de San Andres, Departamento de Economia, revised May 2000.
  3. Drazen, Allan & Masson, Paul R, 1994. "Credibility of Policies versus Credibility of Policymakers," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(3), pages 735-54, August.
  4. Guillermo Calvo & Carlos A. Végh Gramont, 1991. "Exchange-Rate-Based Stabilization under Imperfect Credibility," IMF Working Papers 91/77, International Monetary Fund.
  5. Pablo Emilio Guidotti & Carlos A. Végh Gramont, 1992. "Losing Credibility," IMF Working Papers 92/73, International Monetary Fund.
  6. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2003. "Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons," NBER Working Papers 9828, National Bureau of Economic Research, Inc.
  7. Eduardo Lora & Ugo Panizza, 2002. "Structural Reforms in Latin America under Scrutiny," Research Department Publications, Inter-American Development Bank, Research Department 4301, Inter-American Development Bank, Research Department.
  8. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262522608, December.
  9. Lars Peter Hansen & Thomas J. Sargent, 2001. "Acknowledging Misspecification in Macroeconomic Theory," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 519-535, July.
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Citations

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Cited by:
  1. Jean-Charles Rochet, 2006. "Optimal Sovereign Debt: An Analytical Approach," Research Department Publications, Inter-American Development Bank, Research Department 4477, Inter-American Development Bank, Research Department.
  2. Marcos A. Buscaglia, 2003. "The Political-Economy of Argentina’s Debacle," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 2003-594, William Davidson Institute at the University of Michigan.
  3. Martín Guzmán & Martín Fiszbein, 2011. "Un Marco para el Análisis de los Procesos Macroeconómicos en la obra de Prebisch," Department of Economics, Working Papers 084, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
  4. Vlad Ivanenko, 2003. "Non-monetary Trade and Differential Access to Credit in the Russian Transition," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 539, William Davidson Institute at the University of Michigan.
  5. Martín Guzman & Pablo Gluzmann, 2012. "Tensions in the Implementation of Central Banks’ Policies in the Pursuit of Economic Development," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, Central Bank of Argentina, Economic Research Department, vol. 1(65-66), pages 173-205, September.
  6. García-Fronti, Javier & Miller, Marcus & Zhang, Lei, 2005. "Credit Crunch and Keynesian Contraction: Argentina in Crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4889, C.E.P.R. Discussion Papers.
  7. Osvaldo Schenone, 2003. "Déficit y Convertibilidad en Argentina 1991-2001: Inconsistencia Asimétrica," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 40(121), pages 768-773.
  8. Jeannette Jackson & Maria Coolican, 2002. "Healthy Organizations and the Link to Peaceful Societies: Strategies for Implementing Organizational Change," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 536, William Davidson Institute at the University of Michigan.

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