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Argentina’s “Missing Capital” Puzzle and Limited Commitment Constraints

Author

Listed:
  • Kapicka, Marek

    (Center for Economic Research and Graduate Education and Economics Institute (CERGE-EI))

  • Kydland, Finn E.

    (University of California, Santa Barbara)

  • Zarazaga, Carlos E.

    () (Federal Reserve Bank of Dallas)

Abstract

Capital accumulation in Argentina was slow in the 1990s, despite high total factor productivity (TFP) growth and low international interest rates. A possible explanation for the “missing capital” is that foreign investors were reluctant to take advantage of the high returns to investment seemingly offered by that small open economy under such favorable conditions, on the grounds that previous historical developments had led them to perceive Argentina as a country prone to external debt “opportunistic defaults.” The paper examines this conjecture from the perspective of an optimal contract between foreign lenders and a small open economy subject to limited commitment constraints. Numerical experiments for a deterministic version of that analytical framework show that limited commitment constraints introduce an asymmetry to the capital accumulation process of small open economies: the responses of investment to positive TFP shocks are muted and shortlived, while those to negative TFP shocks are large and persistent. Furthermore, under some circumstances, a lower international interest rate environment can magnify the asymmetry. A quantitative implementation of the model economy to data from Argentina accounts, in line with asymmetry just described, for the rapid decline that that country’s capital stock experienced, along with a falling TFP during the 1980s, as well as for the lack of any visible recovery of that stock during the significant surges of TFP observed between 1992-1998 and 2002-2008. In the absence of the limited commitment constraint, Argentina’s capital stock in 2008 would have been 50% higher than it actually was.

Suggested Citation

  • Kapicka, Marek & Kydland, Finn E. & Zarazaga, Carlos E., 2018. "Argentina’s “Missing Capital” Puzzle and Limited Commitment Constraints," Working Papers 1815, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddwp:1815
    DOI: 10.24149/wp1815
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    File URL: https://www.dallasfed.org/-/media/documents/research/papers/2018/wp1815.pdf
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    References listed on IDEAS

    as
    1. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-775, August.
    2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    3. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    external debt opportunistic defaults; missing capital; optimal contract; limited commitment constraints; capital accumulation; Argentina;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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