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

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  • Guillermo A. Calvo
  • Alejandro Izquierdo
  • Ernesto Talvi

Abstract

We offer an alternative explanation for the 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 breaks 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 supply 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 piers. We also provide 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, 2003. "Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons," NBER Working Papers 9828, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9828
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    References listed on IDEAS

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    1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    2. Fabrizio Coricelli & Massimo di Matteo & Frank Hahn (ed.), 1998. "New Theories in Growth and Development," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-26270-0.
    3. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-1329, December.
    4. Guillermo A. Calvo, 1998. "Growth, Debt and Economic Transformation: The Capital Flight Problem," Palgrave Macmillan Books, in: Fabrizio Coricelli & Massimo di Matteo & Frank Hahn (ed.), New Theories in Growth and Development, chapter 10, pages 251-269, Palgrave Macmillan.
    5. Guillermo A. Calvo, 2002. "Globalization Hazard and Delayed Reform in Emerging Markets," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 1-31, January.
    6. 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.
    7. Guillermo A. Calvo, 2003. "Explaining Sudden Stops, Growth Collapse and BOP Crises: The Case of Distortionary Output Taxes," NBER Working Papers 9864, National Bureau of Economic Research, Inc.
    8. Federico Sturzenegger & Mariano Tommasi (ed.), 1998. "The Political Economy of Reform," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262194007.
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    More about this item

    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

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