Missed Expectations: The Argentine Convertibility

37 Pages Posted: 19 Feb 2003

See all articles by Sebastian Galiani

Sebastian Galiani

University of Maryland - Department of Economics

Daniel Heymann

Universidad de Buenos Aires

Mariano Tommasi

Universidad de San Andres - Department of Economics

Date Written: November 2002


This paper studies the process that led to the Argentine crisis. The crisis is understood as a major disappointment of previous expectations, indicated by widespread insolvencies and abrupt declines in consumption. The analysis concentrates on the sequence of public and private decisions, and the varying perceptions and policy incentives that motivated them. In the nineties Argentina searched for a new growth trend. During much of the period, the behavior of agents seemed to be based on the anticipation that current and future incomes could sustain a value of domestic spending much higher than in the past. The government was motivated to reinforce those expectations, for signaling and political economy reasons. The convertibility monetary regime not only provided a very visible nominal anchor, but also operated as a basic framework for financial contracts, mostly denominated in dollars. Dollar contracting implicitly presumed that the dollar value of incomes would support the servicing of debts. Despite precautionary measures, the reliance on the sustainability of the real exchange rate increased over time. In the late nineties exports stopped rising and the foreign supply of credit tightened. Facing these constraints, the economy contracted and the solvency of the government was put into question. The financial system was vulnerable both in the event of devaluation and that of a (large) deflation-cum-adjustment. As was implicit in its design and management, convertibility proved to have very large exit costs.

Keywords: Economic Crisis, Contracts, Convertibility and Wealth Perceptions

JEL Classification: E0, E32, E50

Suggested Citation

Galiani, Sebastian and Heymann, Daniel and Tommasi, Mariano, Missed Expectations: The Argentine Convertibility (November 2002). William Davidson Institute Working Paper No. 515. Available at SSRN: https://ssrn.com/abstract=358380 or http://dx.doi.org/10.2139/ssrn.358380

Sebastian Galiani (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Daniel Heymann

Universidad de Buenos Aires ( email )

Buenos Aires

Mariano Tommasi

Universidad de San Andres - Department of Economics ( email )

Vito Dumas 284
Victoria, Buenos Aires B1644BID
+5411-4725-7020 (Phone)

HOME PAGE: http://faculty.udesa.edu.ar/tommasi/index.htm

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