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Financial shocks and macroeconomic policies during the Argentine crisis of 2001-2002

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    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Banco Central del Urugay)

The objective of this paper is analyse the determinants of the Argentine crisis of 2001-2002. In particular we analyse the role of macroeconomic policies during the crisis. The crisis coincided with a sudden stop of capital flows.We use a VAR model to better understand the shocks and mechanisms by which the crisis propagated throughout the economy. We find evidence that Argentine crisis was the consequence of an external financial shock, expressed by the increase in sovereign spread, amplified by local vulnerabilities. Fiscal policy, that faced financial restrictions, was tightened and the economy suffered additional contractionary fiscal shocks. The recession was exacerbated by a real exchange rate shock, that was appreciated. This result is the consequence of the rigid fixed exchange rate used by Argentina and the lack of coordination inside the Mercosur agreement where Brazil devaluate while Argentina not. Our analysis suggests the convenience of generate an institutional framework that allows a flexible use of fiscal and exchange rate policies to confront with adverse external shocks.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2010024.

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Length: 34
Date of creation: 05 Jul 2010
Handle: RePEc:ctl:louvir:2010024
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