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International Borrowing and Macroeconomic Performance in Argentina

  • Kathryn M.E. Dominguez
  • Linda L. Tesar

This paper provides an overview of the major economic events in Argentina from the adoption of the convertibility plan in 1991 to the collapse of the exchange rate regime in 2001. We focus on the relationship between the credibility of the currency board and capital flows, and the inescapable link between fiscal and monetary policy. Argentina inadvertently entered into a vicious circle with financial markets -- one in which it felt compelled to raise the exit costs from the currency board in order to maintain the regime%u2019s credibility. As exit costs mounted, financial markets became increasingly concerned about the dire implications of a devaluation, which in turn, compelled the government to raise exit costs further. In the late 1990s, when Argentina went into recession, it required some sort of stimulus -- either a loosening of monetary policy (i.e. a devaluation) or fiscal stimulus. But either way spelled disaster. The added pressure of capital outflow, first by international investors and then the withdrawal of deposits from the Argentine banking system, eventually tipped the scales.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11353.

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Date of creation: May 2005
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Publication status: published as International Borrowing and Macroeconomic Performance in Argentina , Kathryn M. E. Dominguez, Linda L. Tesar. in Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences , Edwards. 2007
Handle: RePEc:nbr:nberwo:11353
Note: IFM
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