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The anatomy of a multiple crisis : why was Argentina special and what can we learn from it?

Author

Listed:
  • Perry, Guillermo
  • Serven, Luis

Abstract

The Argentine crisis has been variously blamed on fiscal imbalances, real overvaluation, and self-fulfilling investor pessimism triggering a capital flow reversal. The authors provide an encompassing assessment of the role of these and other ingredients in the recent macroeconomic collapse. They show that in the final years of convertibility,Argentina was not hit harder than other emerging markets in Latin America and elsewhere by global terms-of-trade and financial disturbances. So the crisis reflects primarily the high vulnerability to disturbances built into Argentina's policy framework. Three key sources of vulnerability are examined: the hard peg adopted against optimal currency area considerations in a context of wage and price inflexibility; the fragile fiscal position resulting from an expansionary stance in the boom; and the pervasive mismatches in the portfolios of banks'borrowers. While there were important vulnerabilities in each of these areas, neither of them was higher than those affecting other countries in the region, and thus there is not one obvious suspect. But the three reinforced each other in such a perverse way that taken jointly they led to a much larger vulnerability to adverse external shocks than in any other country in the region. Underlying these vulnerabilities was a deep structural problem of the Argentine economy that led to harsh policy dilemmas before and after the crisis erupted. On the one hand, the Argentine trade structure made a peg to the dollar highly inconvenient from the point of view of the real economy. On the other hand, the strong preference of Argentinians for the dollar as a store of value-after the hyperinflation and confiscation experiences of the 1980s-had led to a highly dollarized economy in which a hard peg or even full dollarization seemed reasonable alternatives from a financial point of view.

Suggested Citation

  • Perry, Guillermo & Serven, Luis, 2003. "The anatomy of a multiple crisis : why was Argentina special and what can we learn from it?," Policy Research Working Paper Series 3081, The World Bank.
  • Handle: RePEc:wbk:wbrwps:3081
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Cavallaro, Eleonora & Maggi, Bernardo & Mulino, Marcella, 2011. "The macrodynamics of financial fragility within a hard peg arrangement," Economic Modelling, Elsevier, vol. 28(5), pages 2164-2173, September.
    2. Samartin, Margarita & Cardone, Clara & Bustamante, Rodrigo, 2007. "Was the Argentine corralito an efficient measure?: A note," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 444-453.
    3. Peter Montiel & Luis Servén, 2006. "Macroeconomic Stability in Developing Countries: How Much Is Enough?," World Bank Research Observer, World Bank Group, vol. 21(2), pages 151-178.
    4. Jérôme Sgard, 2004. "Ce qu'on en dit après - le Currency Board argentin et sa fin tragique," Post-Print hal-01019663, HAL.
    5. Ramon Moreno, 2002. "Learning from Argentina's crisis," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct18.
    6. Pablo Bustelo Gómez, 2004. "Capital Flows and Financial Crises: A Comparative Analysis of East Asia (1997-97) and Argentina (2001-02)," Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales 04-17, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
    7. World Bank, 2003. "Argentina : Reforming Policies and Institutions for Efficiency and Equity of Public Expenditures," World Bank Other Operational Studies 14637, The World Bank.
    8. Gill, Indermit & Pinto, Brian, 2005. "Public debt in developing countries : has the market-based model worked?," Policy Research Working Paper Series 3674, The World Bank.
    9. repec:eac:articl:08/16 is not listed on IDEAS
    10. Norbert Fiess, 2004. "Chile's Fiscal Rule," Econometric Society 2004 Latin American Meetings 348, Econometric Society.
    11. Jérôme Sgard, 2004. "Ce qu'on en dit après - le Currency Board argentin et sa fin tragique," Sciences Po publications info:hdl:2441/6827, Sciences Po.
    12. Cavallaro, Eleonora & Maggi, Bernardo, 2016. "State of confidence, overborrowing and macroeconomic stabilization in out-of-equilibrium dynamics," Economic Modelling, Elsevier, vol. 59(C), pages 210-223.
    13. Jérôme Sgard, 2004. "Ce qu’on en dit après : le « currency board » argentin et sa fin tragique," Revue d'Économie Financière, Programme National Persée, vol. 75(2), pages 129-151.
    14. Sottile, Pedro, 2013. "On the political determinants of sovereign risk: Evidence from a Markov-switching vector autoregressive model for Argentina," Emerging Markets Review, Elsevier, vol. 15(C), pages 160-185.
    15. Birdsall, Nancy & de la Torre, Augusto & Caicedo, Felipe Valencia, 2010. "The Washington consensus : assessing a damaged brand," Policy Research Working Paper Series 5316, The World Bank.
    16. repec:spo:wpecon:info:hdl:2441/6827 is not listed on IDEAS
    17. Dayoub, Mariam & Lasagabaster, Esperanza, 2008. "General trends in competition policy and investment regulation in mandatory defined contribution markets in Latin America," Policy Research Working Paper Series 4720, The World Bank.
    18. Nuria Malet & Clara Garcia, 2005. "Exchange Market Pressure, Monetary Policy, and Economic Growth: Argentina in 1993 - 2004," Working Papers wp99, Political Economy Research Institute, University of Massachusetts at Amherst.
    19. Thomas Url, 2011. "Rating Agencies: Originator, Accelerant or Simply Dragged Into the Sovereign Debt Crisis?," WIFO Monatsberichte (monthly reports), WIFO, vol. 84(12), pages 811-825, December.
    20. repec:dau:papers:123456789/5486 is not listed on IDEAS

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