To hell and back. Crisis management in a dollarized economy: the case of Uruguay

Julio De Brun and Gerardo Licandro
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Julio De Brun: Universidad ORT (Uruguay)

No 2005004, Documentos de trabajo from Banco Central del Uruguay

Abstract: The purpose of this paper is twofold. First, we would argue that, despite the fact that some elements of contagion were present, irrational behavior should not be regarded as the main explanation for the Uruguayan collapse. Financial fragility, due to liability dollarization and a misdesigned safety net, together with the strong real exchange rate depreciation and spillover effects derived from the Argentinean crisis, led to a rational simultaneous run on both the domestic banking system and the public debt (sudden stop). Secondly, we look at the crisis resolution strategies and see why the first two attempts failed despite the large backup from International Financial Institutions, and the third succeeded. We take a look at the recovery of the Uruguayan economy and point out some basic lessons to be learned from the Uruguayan experience

Pages: 39 pages
Date: 2005-04-14, Revised 2005-09-29
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Citations: View citations in EconPapers (8)

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