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Tango with the gringo: the hard peg and real misalign ment in Argentina

Author

Listed:
  • Enrique Alberola

    () (Banco de España)

  • Humberto López

    () (World Bank)

  • Luis Servén

    () (World Bank)

Abstract

Between 1990 and 2001 the Argentine peso appreciated by 80 percent in real terms, and its overvaluation has been singled out as one of the main suspects in the debate on the causes of the Argentina collapse of late 2001. This paper assesses the degree of real misalignment in Argentina over the Convertibility period using a model in which the equilibrium real exchange rate is defined as the value consistent with (i) a balance of payments position where any current account imbalance is financed by a sustainable flow of international capital (external equilibrium), and (ii) traded / nontraded sector productivity differentials (internal equilibrium). Empirical implementation of the model suggests that the initial real appreciation of the peso, between 1990 and 1993, was consistent with the productivity increases that Argentina enjoyed following the stabilization of the economy after the hyperinflation of the late 1980s. But after 1996 a widening gap opened between the observed real exchange rate and that consistent with a sustainable net foreign asset position. Our estimates indicate that in 2001 the peso was overvalued by over 50 percent. The model allows us to assess how much of the overvaluation resulted from Argentina's inadequate choice of anchor currency and how much from a divergence of fundamentals between the US and Argentina, ultimately due to the maintenance of policies inconsistent with the peg. We find that both factors played a r ole in the overvaluation accumulated between 1977 and 2001 that preceded the collapse of the Convertibility regime.

Suggested Citation

  • Enrique Alberola & Humberto López & Luis Servén, 2004. "Tango with the gringo: the hard peg and real misalign ment in Argentina," Working Papers 0405, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0405
    as

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    References listed on IDEAS

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    Cited by:

    1. Enrique Alberola, 2003. "Misalignment, liabilities dollarization and exchange rate adjustment in Latin America," Working Papers 0309, Banco de España;Working Papers Homepage.
    2. Perry, Guillermo & Serven, Luis, 2003. "The anatomy of a multiple crisis : why was Argentina special and what can we learn from it?," Policy Research Working Paper Series 3081, The World Bank.
    3. Jorge Carrera & Romain Restout, 2008. "Long Run Determinants of Real Exchange Rates in Latin America," Post-Print halshs-00276402, HAL.
    4. Jérôme Sgard, 2004. "Ce qu'on en dit après - le Currency Board argentin et sa fin tragique," Post-Print hal-01019663, HAL.
    5. Camarero, Mariam & Flores, Renato Jr. & Tamarit, Cecilio R., 2006. "Monetary union and productivity differences in Mercosur countries," Journal of Policy Modeling, Elsevier, vol. 28(1), pages 53-66, January.
    6. Yougbaré, Lassana, 2011. "Exchange rate arrangements and misalignments: contrasting words and deeds," MPRA Paper 32362, University Library of Munich, Germany.
    7. Samir Jahjah & Peter Montiel, 2007. "Devaluation, Debt, and Default in Emerging Economies," Open Economies Review, Springer, vol. 18(1), pages 77-93, February.
    8. Corinna Ahlfeld, 2010. "Reputation Sells -Compensation Payments in the Political Sphere," Departmental Discussion Papers 145, University of Goettingen, Department of Economics.
    9. Alper, Ahmet Murat & Civcir, İrfan, 2012. "Can overvaluation prelude to crisis and harm growth in Turkey," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 112-131.
    10. William R. Cline, 2003. "Restoring economic growth in Argentina," Policy Research Working Paper Series 3158, The World Bank.
    11. Jérôme Sgard, 2004. "Ce qu'on en dit après - le Currency Board argentin et sa fin tragique," Sciences Po publications info:hdl:2441/6827, Sciences Po.
    12. Jérôme Sgard, 2004. "Ce qu’on en dit après : le « currency board » argentin et sa fin tragique," Revue d'Économie Financière, Programme National Persée, vol. 75(2), pages 129-151.
    13. repec:spo:wpecon:info:hdl:2441/6827 is not listed on IDEAS
    14. Adela Luque, 2005. "Skill mix and technology in Spain: evidence from firm level data," Working Papers 0513, Banco de España;Working Papers Homepage.
    15. Thierry Buchs, 2005. "Equilibrium Real Exchange Rate In Brazil Estimation And Policy Implications," International Trade 0502013, EconWPA.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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