Working Paper: NBER ID: w9828
Authors: 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.
Keywords: No keywords provided
JEL Codes: F34; F41; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sudden stops in capital flows (SS) (F32) | real exchange rate (RER) (F31) |
| real exchange rate (RER) (F31) | fiscal sustainability (E62) |
| sudden stops in capital flows (SS) (F32) | fiscal sustainability (E62) |
| sudden stops in capital flows (SS) (F32) | political instability (O17) |
| real exchange rate (RER) (F31) | political instability (O17) |
| closed economy (P19) | effects of sudden stops in capital flows (SS) (F32) |
| dollarization (F31) | effects of sudden stops in capital flows (SS) (F32) |