Working Paper: NBER ID: w11353
Authors: kathryn me dominguez; linda l tesar
Abstract: 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's 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.
Keywords: No keywords provided
JEL Codes: O54; F3; F21; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credibility of the currency board (E58) | Capital flows (F32) |
| Raising exit costs (H29) | Concerns about potential devaluation (F31) |
| Concerns about potential devaluation (F31) | Further raising of exit costs (H29) |
| Inability to loosen monetary policy (E49) | Capital outflows (F32) |
| Lack of coordination between fiscal and monetary policy (E61) | Failure of the currency board (F33) |
| Fears of devaluation (F31) | Increased dollarization (F31) |
| Increased dollarization (F31) | Strain on the banking sector (F65) |
| Strain on the banking sector (F65) | Economic collapse (N00) |