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

49 Pages Posted: 21 Apr 2011

See all articles by Alejandro Izquierdo

Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department

Ernesto Talvi

Centro de Estudios de la Realidad Economica y Social (CERES)

Guillermo A. Calvo

Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2002

Abstract

We offer an alternative explanation for t he 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 wreaks 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 sup ply 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 peers. 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 framewo rk also provides elements to rationalize the banking crisis that accompanied the fall of Convertibility.

Suggested Citation

Izquierdo, Alejandro and Talvi, Ernesto and Calvo, Guillermo A., Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons (April 2002). IDB Working Paper No. 393. Available at SSRN: https://ssrn.com/abstract=1817265 or http://dx.doi.org/10.2139/ssrn.1817265

Alejandro Izquierdo (Contact Author)

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

Ernesto Talvi

Centro de Estudios de la Realidad Economica y Social (CERES) ( email )

Antonio Costa 3476
11300 Montevideo
Uruguay
(5982)628-7703 / 628 76 44 (Phone)
(5982)622-0526 (Fax)

Guillermo A. Calvo

Columbia University - School of International & Public Affairs (SIPA) ( email )

420 West 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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