Fiscal and exchange rate policies during the Argentine and Uruguayan crisis of 2001-2002

José Mourelle ()

No 2010012, Documentos de trabajo from Banco Central del Uruguay

Abstract: In this paper we study the Argentine and Uruguayan crisis of 2001-2002 with emphasis in the role played by the exchange rate and fiscal policies followed by the two countries. We find that in both cases the crisis can be understood as the result of an adverse external shock in a vulnerable environment. This environment was characterized by a perverse combination of fixed exchange rate, a fiscal policy not sustainable in a strong sense, and a great de facto dollarization. The Uruguayan peg was more flexible which facilitated a more gradual adjustment of the real exchange rate. Uruguay enjoyed better credit conditions during recession which derived in a different public debt dynamics. By testing cointegration between government expenditures and revenues we find that fiscal policy was not sustainable in a strong sense in Argentina and Uruguay which favored the speculative attacks suffered by the public debt of both countries. We find no clear difference in terms of fiscal sustainability between Uruguay and Argentina. Different credit conditions seem to reflect a different reputation.

Keywords: crisis; Argentina; Uruguay; country risk; fixed exchange rates; fiscal sustainability; dollarization; crisis; Argentina; Uruguay; riesgo país; tipos de cambio fijos; sostenibilidad fiscal; dolarización (search for similar items in EconPapers)
JEL-codes: E32 F33 F34 F41 H63 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2010-12-30
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