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Currency Board and Debt Trap: Evidence from Argentina and Relevance for Estonia

  • Francois Gurtner
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    This paper analyses the November 2000 liquidity crisis that brought Argentina near default on its foreign debt. The main purpose of this paper is to assess whether this crisis may be taken as a warning signal for Estonia, given the similar exchange-rate system shared by the two countries. It seems that with a low level of public debt and a balanced budget, Estonia will not face a similar liquidity crisis as its Latin American counterpart, which remained heavily reliant on foreign borrowings. But the substantial real exchange-rate appreciation of the kroon under the Currency-Board Arrangement has resulted into serious external imbalances, which will need to be corrected to avoid balance of payments pressure and reduce Estonia’s high dependency on the level of foreign direct investments. Classification-JEL:

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    File URL: http://www.sml.hw.ac.uk/downloads/cert/wpa/2002/dp0204.pdf
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    Paper provided by Centre for Economic Reform and Transformation, Heriot Watt University in its series CERT Discussion Papers with number 0204.

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    Date of creation: 2002
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    Handle: RePEc:hwe:certdp:0204
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    Web page: http://www.sml.hw.ac.uk/research/cert.htm

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    1. Frederic S. Mishkin & Miguel A. Savastano, 2000. "Monetary Policy Strategies for Latin America," NBER Working Papers 7617, National Bureau of Economic Research, Inc.
    2. De Broeck, Mark & Slok, Torsten, 2006. "Interpreting real exchange rate movements in transition countries," Journal of International Economics, Elsevier, vol. 68(2), pages 368-383, March.
    3. Nouriel Roubini & Paul Wachtel, 1998. "Current Account Sustainability in Transition Economies," NBER Working Papers 6468, National Bureau of Economic Research, Inc.
    4. Nada Choueiri & Graciela Laura Kaminsky, 1999. "Has the Nature of Crises Changed? A L1812Quarter Century of Currency Crises in Argentina," IMF Working Papers 99/152, International Monetary Fund.
    5. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
    6. Sachs, Jeffrey D, 1996. "Economic Transition and the Exchange-Rate Regime," American Economic Review, American Economic Association, vol. 86(2), pages 147-52, May.
    7. Panagiotis Liargovas, 1999. "An Assessment of Real Exchange Rate Movements in the Transition Economies of Central and Eastern Europe," Post-Communist Economies, Taylor & Francis Journals, vol. 11(3), pages 299-318.
    8. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
    9. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
    10. Grafe, Clemens & Wyplosz, Charles, 1997. "The Real Exchange Rate in Transition Economies," CEPR Discussion Papers 1773, C.E.P.R. Discussion Papers.
    11. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, March.
    12. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals; A Methodological Comparison of Beers and Feers," IMF Working Papers 98/67, International Monetary Fund.
    13. International Monetary Fund, 2001. "Argentina; Second Review Under the Stand-By Arrangement and Request for Augmentation—Staff Report; Staff Statement; Press Release on the Executive Board Discussion," IMF Staff Country Reports 01/26, International Monetary Fund.
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