Working Paper: NBER ID: w2376
Authors: Robert E. Cumby; Sweder van Wijnbergen
Abstract: In this paper we present a model of a balance-of-payments crisis and use it to examine the Argentine experiment with a crawling peg between December 1978 and February 1981. The approach taken allows us to examine the evolution of a crisis when the collapse is not a perfectly-foreseen event. The implementation of the model yields plausible values of the one-month ahead probabilities of a collapse of the crawling peg. The probabilities exhibit a sharp increase in the middle of 1980 and indicate a significant loss of credibility throughout the remainder of the year. The results suggest that viability of an exchange rate regime depends strongly on the domestic credit policy followed by the authorities. If this policy is not consistent with the exchange rate policy pursued by the authorities, confidence in the exchange rate policy is undermined.
Keywords: Crawling Peg; Exchange Rate Policy; Balance of Payments Crisis; Argentina; Domestic Credit Policy
JEL Codes: F31; F33; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic credit growth (E51) | probability of collapse (G33) |
| Domestic credit growth exceeding critical threshold (F65) | likelihood of collapse increases (G33) |
| Domestic credit growth surge (March 1980) (E51) | estimated probability of collapse (81% by April 1980) (E17) |
| Domestic credit policy inconsistency (E51) | undermines confidence in the exchange rate policy (F31) |
| Speculative attack (D84) | collapse (Y60) |
| Central bank decisions (E58) | exchange rate stability (F31) |