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Credit Crunch and Keynesian Contraction: Argentina in Crisis

  • García-Fronti, Javier
  • Miller, Marcus
  • Zhang, Lei

The Argentine convertibility regime, where the peso was fixed at parity with the US dollar, ended with a ‘twin crisis’ – a tripling in the price of a dollar and a protracted closure of the entire banking system – accompanied by an economic contraction so severe that it is often referred to as ‘Nuestra gran depresión’. But the government's attempt to imitate President Roosevelt by pesifying dollar loan contracts (while simultaneously protecting dollar depositors) had the effect of destroying bank net worth in the absence of credible compensation. To analyse the macroeconomic effects of credit crunch and currency collapse (and of policies to mitigate them), we turn to a model of crisis, specifically that of Aghion, Bacchetta & Banerjee (2000). Our account, however, combines the supply contraction cause by balance sheet effect with a Keynesian demand contraction due to a domestic credit crunch, exacerbated by unsuccessful resolution of the banking crisis. The latter is analysed as a game of political economy played between government and banks about who pays for the banking crisis induced by default and asymmetric pesification.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4889.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4889
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  1. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
  2. García-Fronti, Javier & Miller, Marcus & Zhang, Lei, 2002. "Sovereign Default By Argentina: 'Slow Motion Train Crash' or Self-Fulfilling Crisis?," CEPR Discussion Papers 3399, C.E.P.R. Discussion Papers.
  3. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
  4. 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.
  5. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2001. "A Corporate Balance-Sheet Approach to Currency Crises," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.14, Université de Lausanne, Faculté des HEC, DEEP.
  6. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2000. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," Working Papers 00.07, Swiss National Bank, Study Center Gerzensee.
  7. Fukuda, Shin-ichi & Hoshi, Takeo & Ito, Takatoshi & Rose, Andrew, 2006. "International Finance," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 455-458, December.
  8. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1999. "A Simple Model of Monetary Pollicy and Currency Crises," Working Papers 99.05, Swiss National Bank, Study Center Gerzensee.
  9. Frankel, Jeffrey, 2005. "Contractionary Currency Crashes In Developing Countries," Working Paper Series rwp05-017, Harvard University, John F. Kennedy School of Government.
  10. David Kreps & Paul Milgrom & John Roberts & Bob Wilson, 2010. "Rational Cooperation in the Finitely Repeated Prisoners' Dilemma," Levine's Working Paper Archive 239, David K. Levine.
  11. repec:rus:hseeco:124089 is not listed on IDEAS
  12. Kohlscheen, Emanuel & O'Connell, Stephen A., 2006. "A Sovereign Debt Model with Trade Credit and Reserves," The Warwick Economics Research Paper Series (TWERPS) 743, University of Warwick, Department of Economics.
  13. Michael Mussa, 2002. "Argentina and the Fund: From Triumph to Tragedy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa67, May.
  14. Sebastian Galiani & Mariano Tommasi & Daniel Heymann, 2002. "Missed Expectations: The Argentine Convertibility," Working Papers 55, Universidad de San Andres, Departamento de Economia, revised Nov 2003.
  15. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2002. "IS-LM-BP in the Pampas," NBER Working Papers 9337, National Bureau of Economic Research, Inc.
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