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Hard Peg versus Soft Float. A Tale of Two Latin-American Countries

  • Martin Grandes
  • Helmut Reisen

This paper deals with how the exchange-rate regime of Argentina and Mexico shaped macroeconomic performance over the period 1994-2001. The purpose of the analysis is to draw lessons for Latin American and other countries on whether and how the choice of the exchange-rate regime can help sustained growth. As it is impossible to isolate the growth effect of the exchange-rate regime in a comparative country study, the paper emphasises those macro variables that have been identified in the theoretical and empirical literature as important channels through which the choice of the regime affects economic performance: a) investment, b) trade openness, c) capital flows and d) fiscal or institutional rigidities and public debt sustainability. These channel checks confirm 1997/1998 as the ??breakeven?? year, since Mexico?'s managed floating currency regime has yielded, higher pay off relative to Argentina?'s currency board, faced with successive external shocks.

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Article provided by Presses de Sciences-Po in its journal Revue économique.

Volume (Year): 54 (2003)
Issue (Month): 5 ()
Pages: 1057-1090

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Handle: RePEc:cai:recosp:reco_545_1057
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  1. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Harvard Institute of Economic Research Working Papers 1759, Harvard - Institute of Economic Research.
  2. Yan Sun, 2003. "Do Fixed Exchange Rates Induce More Fiscal Discipline?," IMF Working Papers 03/78, International Monetary Fund.
  3. Andreas Freytag, 2002. "Choice of an Exchange-Rate Arrangement, Institutional Setting and Inflation: Empirical Evidence From Latin America," OECD Development Centre Working Papers 198, OECD Publishing.
  4. Felipe Morandé & Klaus Schmidt-Hebbel, 2000. "Chile's Peso: Better than (Just) Living with the Dollar?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 37(110), pages 177-226.
  5. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  6. Reisen, Helmut & Soto, Marcelo, 2001. "Which Types of Capital Inflows Foster Developing-Country Growth?," International Finance, Wiley Blackwell, vol. 4(1), pages 1-14, Spring.
  7. Eduardo Borensztein & Andrew Berg, 2000. "The Pros and Cons of Full Dollarization," IMF Working Papers 00/50, International Monetary Fund.
  8. Schmidt-Hebbel, Klaus & Serven, Luis & Solimano, Andres, 1994. "Saving, investment, and growth in developing countries : an overview," Policy Research Working Paper Series 1382, The World Bank.
  9. John Williamson, 2000. "Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option," Peterson Institute Press: Policy Analyses in International Economics, Peterson Institute for International Economics, number pa60, 03.
  10. Ffrench-Davis, Ricardo & Larrain, Guillermo, 2002. "How Optimal are the Extremes? Latin American Exchange Rate Policies During the Asian Crisis," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  11. Rose, Andrew, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," Seminar Papers 678, Stockholm University, Institute for International Economic Studies.
  12. Reisen, Helmut, 1989. "Public debt, North and South," Policy Research Working Paper Series 253, The World Bank.
  13. Julio Nogués & Martín Grandes, 2001. "COUNTRY RISK: Economic Policy, Contagion Effect or Political noise?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 125-162, May.
  14. Kristian Nilsson & Lars Nilsson, 2000. "Exchange Rate Regimes and Export Performance of Developing Countries," The World Economy, Wiley Blackwell, vol. 23(3), pages 331-349, 03.
  15. Vivek B. Arora & Martin D. Cerisola, 2000. "How Does U.S. Monetary Policy Influence Economic Conditions in Emerging Markets?," IMF Working Papers 00/148, International Monetary Fund.
  16. Carlos A. Rodríguez, 1999. "Macroeconomic Policies: Can We Transfer Lessons Across LDC's?," CEMA Working Papers: Serie Documentos de Trabajo. 150, Universidad del CEMA.
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