Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons

Guillermo Calvo, Alejandro Izquierdo and Ernesto Talvi

No 9828, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F34 F41 (search for similar items in EconPapers)
Date: 2003-07
New Economics Papers: this item is included in nep-ifn and nep-lam
Note: IFM
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Citations: View citations in EconPapers (173)

Published as Alexander V., Mélitz J., von Furstenberg G.M. (eds.) Monetary Unions and Hard Pegs. Oxford, UK: Oxford University Press, June 3, 2004. p. 151-182
Published as Calvo, Guillermo. Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy? Cambridge, MA: MIT Press, 2005. p. 143-180
Published as Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2006. "Sudden Stops and Phoenix Miracles in Emerging Markets," American Economic Review, American Economic Association, vol. 96(2), pages 405-410, May.

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Working Paper: Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons (2003)
Working Paper: Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons (2002)
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