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Financial Fragility and Currency Crisis: a Macrodynamical Revisitation of the Argentinaâs Experience
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 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 Argentina’s Experience
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
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,
Living and Dying with Hard Pegs: The Rise and Fall of Argentina�s Currency Board
SSRN Electronic Journal, 2003
The rise and fall of Argentina's currency board illustrates the extent to which the advantages of hard pegs have been overstated. The currency board did provide nominal stability and boosted financial intermediation, at the cost of endogenous financial dollarization, but did not foster fiscal or monetary discipline. The failure to adequately address the currency-growth-debt trap, into which Argentina fell at the end of the 1990s, precipitated a run on the currency and the banks, followed by the abandonment of the currency board and a sovereign debt default. The crisis can be best interpreted as a bad outcome of a high-stakes strategy to overcome a weak currency problem. To increase the credibility of the hard peg, the government raised its exit costs, which deepened the crisis once exit could no longer be avoided. But some alternative exit strategies would have been less destructive than the one adopted.
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.
1999
This paper evaluates the usefulness of a currency board regime based on Argentina’s experience. Argentina adopted the currency board in March 1991 to put an end to a long history of large macroeconomic imbalances and high inflation that culminated in the hyperinflation process of 1989-91. The regime has been extremely successful in restoring macroeconomic stability and ensuring low inflation. The adoption of a tight fiscal stance, and of sound polices to strengthen the financial system were critical to ensure the resilience of the economy to respond to adverse external shocks. The paper will argue that a strict exchange rate rule like the one used in Argentina can be a strong alternative to other exchange rate regimes to ensure macroeconomic stability in a globalized world with highly integrated capital markets.
The lender of last resort function under a currency board: The case of Argentina
Open Economies Review, 1996
Within the current rules of the game, Argentina's central the sector (which could give it greater access to outside bank (BCRA) is charged with being the lender of last liquidity) and prudential strengthening of the system. resort as well as providing full convertibility between Triage of weaker banks should continue and not await pesos and U.S. dollarstwo objectives with one another crisis. More experience with the new liquidity instrument, namely, reserves. Within those rules, it may policy is needed and so is reform of the settlement well be that the balance of responsibilities needs to shift. system, as it affects the functioning of the interbank Complete dollarization can significantly reduce risks but market, which is essential for containing crises. not entirely eliminate them. If the BCRA can concentrate Essentially, however, no grand solution seems to exist more on building up reserves and helping to ward off for the problems that seem inevitable in a system where crises of confidence in the currency, perhaps the banking the central bank is also the currency board. Argentina's system can protect itself better from liquidity shocks. But strategy must therefore turn on actively strengthening its this will require, among other things, consolidation of banking systems to reduce the risks of insolvency.