Sovereign Default By Argentina: 'Slow Motion Train Crash' or Self-Fulfilling Crisis?
To check hyperinflation, Argentina pegged the peso at one US dollar in 1991. This stopped inflation in its tracks: but, with the rise of the dollar against the Euro and the substantial devaluation of the Brazilian real, the peso became increasingly over-valued leading to a significant country-risk premium on Argentine dollar liabilities as devaluation with ‘pesification’ was anticipated. Here, we apply the Ozkan and Sutherland (1998) model of over-valuation and currency crisis to analyse three scenarios: (i) that Cavallo unnecessarily delayed devaluation, (ii) that the delay was reasonable, and (iii) Cavallo’s view, that the peg should have been preserved but was destroyed by self-fulfilling panic. In conclusion, we argue that, as the costs associated with devaluation and default are largely determined ex post, so the appropriate interpretation depends on how the crisis is handled.
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gulcin Ozkan & Alan Sutherland, .
"A Currency Crisis Model with an Optimising Policymaker,"
96/11, Department of Economics, University of York.
- Ozkan, F. Gulcin & Sutherland, Alan, 1998. "A currency crisis model with an optimising policymaker," Journal of International Economics, Elsevier, vol. 44(2), pages 339-364, April.
- Sachs, Jeffrey & Tornell, Aaron & Velasco, Andres, 1996.
"The Mexican peso crisis: Sudden death or death foretold?,"
Journal of International Economics,
Elsevier, vol. 41(3-4), pages 265-283, November.
- Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "The Mexican Peso Crisis: Sudden Death or Death Foretold?," NBER Working Papers 5563, National Bureau of Economic Research, Inc.
- Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "The Mexican Peso Crisis: Sudden Death or Death Foretold?," Harvard Institute of Economic Research Working Papers 1760, Harvard - Institute of Economic Research.
- Sachs, J. & Tornell, A. & Velasco, A., 1996. "The Mexican Peso Crisis: Sudden Death or Death Foretold?," Working Papers 96-20, C.V. Starr Center for Applied Economics, New York University.
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