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Great Expectations and Hard Times: The Argentine Convertibility Plan

Author

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  • Sebastian Galiani

    ()

  • Daniel Heymann

    ()

  • Mariano Tommasi

    ()

Abstract

This paper studies the process that led to the Argentine crisis. The analysis concentrates on the sequence of public and private decisions, together with the varying perceptions and policy incentives that motivated them. In the 1990s, 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 (in both real and dollar terms). The government was motivated to reinforce those expectations, for signaling and political economy reasons. The 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 actions on the part of the government and the private sector, over time, an increasing mass of decisions and contracts came to rely on the sustainability of the real exchange rate. In the late 1990s, exports stopped rising, and the foreign supply of credit tightened. The economy contracted in the face of these constraints, and the solvency of the government was called into question. The financial system was vulnerable both in the event of devaluation and in the event of a (large) deflation-cum-adjustment. Convertibility proved to have very large exit costs, as was implicit in its design and management.

Suggested Citation

  • Sebastian Galiani & Daniel Heymann & Mariano Tommasi, 2003. "Great Expectations and Hard Times: The Argentine Convertibility Plan," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 109-160, January.
  • Handle: RePEc:col:000425:008683
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    Citations

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    Cited by:

    1. Michael D. Bordo & Lars Jonung & Agnieszka Markiewicz, 2013. "A Fiscal Union for the Euro: Some Lessons from History ," CESifo Economic Studies, CESifo, vol. 59(3), pages 449-488, September.
    2. Daniel Heymann & Adrián Ramos, 2005. "MERCOSUR in Transition: Macroeconomic Perspectives," IDB Publications (Working Papers) 2932, Inter-American Development Bank.
    3. Guillermo Cruces, 2005. "Income Fluctuations, Poverty and Well-Being Over Time: Theory and Application to Argentina," Labor and Demography 0502007, EconWPA.
    4. Mariano Tommasi & Alvaro Forteza & German Herrera, 2005. "Understanding Reform in Latin America," Working Papers 88, Universidad de San Andres, Departamento de Economia, revised Dec 2005.
    5. Horacio Aguirre, 2007. "The financial position of households after a macroeconomic crisis: the case of Argentina," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Measuring the financial position of the household sector", Basel, 30-31 August 2006 - Volume 2, volume 26, pages 324-341 Bank for International Settlements.
    6. repec:eee:intfin:v:49:y:2017:i:c:p:32-47 is not listed on IDEAS
    7. Daniel Heymann & Adrián Ramos & Horacio Aguirre, 2011. "Inflation and Macroeconomic Policies in Post-convertibility Argentina," Chapters,in: The Economies of Argentina and Brazil, chapter 19 Edward Elgar Publishing.
    8. Birdsall, Nancy & de la Torre, Augusto & Caicedo, Felipe Valencia, 2010. "The Washington consensus : assessing a damaged brand," Policy Research Working Paper Series 5316, The World Bank.
    9. David McKenzie & Ernesto Schargrodsky, 2005. "Buying Less, But Shopping More: Changes In Consumption Patterns During A Crisis," Business School Working Papers buyinglessshop, Universidad Torcuato Di Tella.
    10. Hansen, Bodil Olai & Keiding, Hans, 2006. "Financial Intermediation, Moral Hazard, And Pareto Inferior Trade," Working Papers 07-2004, Copenhagen Business School, Department of Economics.
    11. Diego Aparicio & Daniel Fraiman, 2015. "Banking Networks And Leverage Dependence In Emerging Countries," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 18(07n08), pages 1-21, November.
    12. Mariano Tommasi, 2003. "Crises, institutions politiques et réformes politiques : le bon, le mauvais et l'affreux," Revue d’économie du développement, De Boeck Université, vol. 11(2), pages 49-81.
    13. Mariano Tommasi & Pablo T. Spiller & Ernesto Stein, 2003. "Political Institutions, Policymaking Processes, and Policy Outcomes. An Intertemporal Transactions Framework," Working Papers 59, Universidad de San Andres, Departamento de Economia, revised Jul 2003.
    14. Daniel Heymann, 2009. "Notes on Varieties of Crises," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(53-54), pages 67-71, January -.
    15. Sebastian Galiani & Ivan Torre & Gustavo Torrens, 2015. "International Organizations and Structural Reforms," NBER Working Papers 21237, National Bureau of Economic Research, Inc.
    16. Heymann, Daniel & Ramos, Adrián, 2005. "MERCOSUR in transition: macroeconomic perspectives," Documentos de Proyectos 55, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).

    More about this item

    Keywords

    Argentine crisis; public policy; deflation-cum-adjusment; political economy;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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