Financial Fragility and Currency Crisis: a Macrodynamical Revisitation of the Argentina’s Experience (original) (raw)

Financial Fragility and Currency Crisis: A Macrodynamical Revisitation of Argentina's Experience

Working Papers- …, 2010

The paper presents an open-economy macrodynamical growth model with the aim of giving an endogenous characterisation to the process that leads a small country with a currency-board arrangement to accumulate dangerously high levels of external debt and become vulnerable to macroeconomic instability. The macrodynamics of the model results from the combination of the commitment to maintain the peg-that makes liquidity closely dependent on the dynamics of foreign reservesand the non-linear real and financial interactions that drives the pro-cyclical behaviour of the economy. Within this context, the external finance ease during an economic upswing leads to debt-supported growth and financial fragility; the consequent deterioration of profitability expectations brings about a capital reversal that, in the absence of monetary stabilization tools, makes the currency arrangement unsustainable. A financial crisis may thus turn into a currency crisis. We run a continuous-time estimation of a non-linear differential equations system for Argentina during the years of the currency-board arrangement. We find that two steady-state solutions exist. The local stability and sensitivity analysis show that both equilibria are unstable and that the qualitative nature of the equilibria depends in particular on lenders' responsiveness to the degree of leverage. On the contrary, when considering a different currency arrangement with an autonomous monetary policy, the system becomes stable.

Financial Fragility and Currency Crisis: a Macrodynamical Revisitation of the Argentinaâs Experience

2010

The macrodynamics of financial fragility within a hard peg arrangement

Economic Modelling, 2011

Fiscal Sustainability and Crises. The Case of Argentina

2000

This paper contributes to the study of the economic history of argentine crises by analyzing the fiscal sustainability for the period 1865-2002. Fiscal deficits are sustainable if the current market value of debt equals to the discounted sum of expected future surpluses. Following a large literature started by sustainability is empirically tested by finding out if revenues and expenditures (including interest payments) are cointegrated along a given period.

The Macrodynamics of External Overborrowing and Systemic Instability in a Small Open Economy

Studies in Nonlinear Dynamics and Econometrics, 2012

The paper presents a monetary growth model for a small emerging economy with a currency board arrangement. The integration into global financial markets determines an acceleration of debt-creating capital inflows that boosts growth and the prospect of future profits, and leads to the building-up of large imbalances in the public and private sectors. Financial fragility undermines the state of confidence and determines an endogenous capital reversal. At this stage, the strong commitment to maintain the peg leaves no room for stabilization purposes and leads to systemic instability. We run a continuous-time estimation of the non-linear differential equations system of the model, with reference to Argentina during the years of the currency-board arrangement. We find two steady-state solutions, corresponding to a high-interest rate and a low-interest rate equilibrium, respectively. The local stability and sensitivity analysis show that both equilibria are unstable and that the system is intrinsically fragile. We show that even a tighter fiscal policy, according to the prescriptions of international institutions, results ineffective in improving stability. * The authors wish to thank C. R. Wymer for suggestions and helpful comments on the empirical analysis. We also wish to thank participants to the Conference in Honor of Giancarlo Gandolfo, Rome September 2010, where a preliminary version of the paper was presented. Maggi B. and Cavallaro E. wish to thank for financial support from "Ricerca di Università (ex Ateneo) anno 2007-prot. C26A07ZJJ2."

Living and Dying with Hard Pegs: The Rise and Fall of Argentina's Currency Board [with Comments]

2003

The rise and fall of Argentina's currency board shows the abandonmenlt of the currency board and a sovereign debt extent to which the advantages of hard pegs have bcen default. The crisis can be best interpreted as a bad overstated. The currency board did provide nomilinal outcome of a high-stakes strategy to overcome a weak stability and boosted financial intermediation, at the cost currency problem. To increase the credibility of the hard of endogenous finaicial dollarization, but did not foster peg, the government raised its exit costs, which deepened monetary or fiscal discipline. The failure to adequately the crisis once exit could no longer be avoided. But some address the currency-growth-debt trap into whichi alternative exit strategies would have been less Argentina fell at the end of the 1990s precipitated a run destructive than the one adopted. on the currency and the banks, followed by the This paper-a product of Macroeconomics and Growth, Development Research Group-is part of a larger effort in the group to understand 1ow currency regimes work. Copies of the paper are available free from the World Bank,

An Analysis of the 2002 Argentine Currency Crisis ∗

2006

In 1991 the Argentine Government embarked on an ambitious exchange rate based stabilization (ERBS) program aimed at removing the enticement of using money creation to finance the pervasive fiscal imbalances that have been a feature of the Argentine economic landscape. Despite the strait-jacket of this program and the early successes achieved, within a decade of its implementation the program collapsed and resulted in the largest debt default in history. This paper analyzes the circumstances leading up to the failure of Argentina’s experiment with this currency board arrangement and the ensuing currency crisis of 2002. In doing so, the paper places this particular episode of exchange rate crisis into the broader context of the three generations of currency crisis models under consideration in the literature. It will be argued that the mixture of unsustainable debt dynamics, an overvalued real exchange rate coupled with labor market rigidities, and the moral hazard presented by the la...

Thirty Years of Currency Crises in Argentina: External Shocks or Domestic Fragility?

2009

This paper examines Argentina's currency crises from 1970 to 2001, with particular attention to the role of domestic and external factors. Using VAR estimations, we find that deteriorating domestic fundamentals matter. For example, at the core of the late 1980s crises was excessively loose monetary policy while a sharp output contration triggered the collapse of the currency board in January 2002. In contrast, adverse external shocks were at the heart of the 1995 crisis, with spillovers from the Mexican crisis and high world interest rates being key sources of financial distress.

External debt in emerging economies: a macrodynamical model of financial fragility

RePEc: Research Papers in Economics, 2002

Following both the balance-sheet approach to currency crises and the financial fragility literature, the paper presents an open economy macrodynamical monetary growth model with the aim of giving an endogenous characterisation to the process that, over time, leads an emerging economy to accumulate dangerously high levels of debt and to be vulnerable to macroeconomic instability. The model explores the nonlinear real and financial interaction at work, with the endogenously generated liquidity feeding back dynamically to firms' investment, the level of output, the interest rate and the expected rate of return. The paper shows that the system may display instability if lenders and borrowers are not too concerned with firms' degree of leverage, profitability expectations do not take adequately into account firms' financial structure, and destabilising feedback mechanisms dominate, which go from debt accumulation and profitability expectations onto the rate of profit and the interest rate. As a result, the economy may incur in excessive foreign borrowing. The consequent worsening in firms' balance sheets may turn into financial fragility, and over time bring about a fall in external lending. A prolonged recession may thus follow, possibly calling into question the currency arrangements; hence, a financial crisis may turn into a currency crisis.

A Model of Self-fulfilling Exchange Rate Crisis With Sovereign Debts

The collapse of Argentina's currency board provides further evidence that fiscal profli- gacy (whether financed by domestic money creation or foreign debt) is incompatible with the maintenance of any fixed exchange rate regime. In this paper we analyze a dynamic general equilibrium model with a mixture of fiscal deficits, stochastic endowment, and sovereign debts. It oers an environment in which a loss of confidence in the sustain- ability of the government's fiscal position creates an environment for exchange rate crises. The evidence provided demonstrates that the Argentine government's decision to abandon the peg in 2002 - following the default on its international debts, was a self-fulfilling out- come of agent's expectations based on the underlying economic environment. Moreover, we also show that in an essentially identical economic framework - where the equilibrium probability of default is low, the optimal action for the government would be to maintain th...

Financial Fragility and Currency Crisis: a Macrodynamical Revisitation of the Argentina’s Experience (original) (raw)

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