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Credit Crunch and Keynesian Contraction: Argentina in Crisis

Javier García-Fronti (), Marcus Miller () and Lei Zhang ()

No 4889, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The Argentine convertibility regime, where the peso was fixed at parity with the US dollar, ended with a ‘twin crisis’ – a tripling in the price of a dollar and a protracted closure of the entire banking system – accompanied by an economic contraction so severe that it is often referred to as ‘Nuestra gran depresión’. But the government's attempt to imitate President Roosevelt by pesifying dollar loan contracts (while simultaneously protecting dollar depositors) had the effect of destroying bank net worth in the absence of credible compensation. To analyse the macroeconomic effects of credit crunch and currency collapse (and of policies to mitigate them), we turn to a model of crisis, specifically that of Aghion, Bacchetta & Banerjee (2000). Our account, however, combines the supply contraction cause by balance sheet effect with a Keynesian demand contraction due to a domestic credit crunch, exacerbated by unsuccessful resolution of the banking crisis. The latter is analysed as a game of political economy played between government and banks about who pays for the banking crisis induced by default and asymmetric pesification.

Keywords: Argentina debt crisis; asymmetric pesification; conflicting beliefs; keynesian recession; twin crisis (search for similar items in EconPapers)
JEL-codes: E12 E51 F34 G18 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-mac, nep-pke and nep-pol
Date: 2005-01
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