The impact of policy announcements and news on capital markets : crisis management in Argentina during the Tequila Effect
Argentina was hit hard by the Mexican crisis of 1994-95. The Argentine peso came under attack and there was a run on bank deposits. Argentina'successfully announced a series of policies to mitigate the spillover effects, without abandoning its currency board. The authors show how capital markets reacted to each policy announcement and piece of breaking news. They find that Argentina's agreement with the International Monetary Fund, the dollarization of reserve deposits in the central bank, and the reduction in reserve requirements, among other things, had a strong positive impact on market returns. The market welcomed announcements that reflected the adoption of credible policies and demonstrated a firm commitment to the currency board. The authors also find that, after a period of higher volatility, the appointment of a new finance minister (after Domingo Cavallo left the finance ministry) calmed down stock and bond markets, significantly decreasing the variance in stock and bond market returns. On the other hand, the interest rate became more volatile after the appointment of the new finance minister and when reserve requirements were lowered.
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