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Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons

Author

Listed:
  • Guillermo A. Calvo
  • Alejandro Izquierdo
  • Ernesto Talvi

Abstract

This paper offers an alternative explanation for t he fall of Argentina's Convertibility Program based on the country's vulnerability to Sudden Stops in capital flows. Sudden Stops are typically accompanied by a substantial increase in the real exchange rate that wreaks havoc in countries that are heavily dollarized in their liabilities, turning otherwise sustainable fiscal and corporate sector positions into unsustainable ones. In particular, we stress that the required change in relative prices is larger the more closed an economy is in terms of its sup ply of tradable goods. By contrasting Argentina's performance relative to other Latin American countries that were also subject to the Sudden Stop triggered by the Russian crisis of 1998, we identify key vulnerability indicators that separated Argentina from its peers. This document also provides an explanation for the political maelstrom that ensued after the Sudden Stop, based on a War of Attrition argument related to the wealth redistribution conflict triggered by the Sudden Stop and fiscal collapse. This framework also provides elements to rationalize the banking crisis that accompanied the fall of Convertibility.

Suggested Citation

  • Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," IDB Publications (Working Papers) 1909, Inter-American Development Bank.
  • Handle: RePEc:idb:brikps:1909
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    File URL: http://publications.iadb.org/bitstream/handle/11319/1909/Sudden%20Stops%2c%20the%20Real%20Exchange%20Rate%20and%20Fiscal%20Sustainability%3a%20Argentina%60s%20Lessons.pdf?sequence=1
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    References listed on IDEAS

    as
    1. Guillermo A. Calvo, 2002. "Globalization Hazard and Delayed Reform in Emerging Markets," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 1-31, January.
    2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    3. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
    4. Federico Sturzenegger & Mariano Tommasi (ed.), 1998. "The Political Economy of Reform," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262194007, January.
    5. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-1329, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Exchange rates; Fiscal Policy; WP-469;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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