Testing the Exogeneity of Argentine Devaluation and Default Risks in Retrospect

26 Pages Posted: 5 Nov 2005

See all articles by Hildegart Ahumada

Hildegart Ahumada

Universidad Torcuato Di Tella - School of Government

Maria Lorena Garegnani

Central Bank of Argentina; Universidad Nacional de La Plata - Department of Economics

Abstract

This paper studies the relationship between devaluation and default risks during Argentina's convertibility regime. Before default and devaluation occurred, a harder variant of the currency regime was under discussion. An often-suggested argument among the supporters of dollarization was that the probability of default could have been reduced by removing fears of devaluation. For this to be true, default risk must be dependent on the devaluation risk. Long-run relationships and 'exogeneity' are examined using a 'cointegrating vector' system approach. The results show that only devaluation risk can be modelled on default risk. No empirical evidence is found in favour of dollarization. Moreover, these conclusions are maintained when the information set is expanded to include the Latin American risk and Argentine macroeconomic variables.

Suggested Citation

Ahumada, Hildegart and Garegnani, Maria Lorena, Testing the Exogeneity of Argentine Devaluation and Default Risks in Retrospect. Oxford Bulletin of Economics & Statistics, Vol. 67, No. 5, pp. 647-672, October 2005, Available at SSRN: https://ssrn.com/abstract=814161

Hildegart Ahumada (Contact Author)

Universidad Torcuato Di Tella - School of Government ( email )

C1428ATG Buenos Aires
Argentina

Maria Lorena Garegnani

Central Bank of Argentina ( email )

Reconquista 266
Edificio Central, piso 7
Buenos Aires, 1003
Argentina

Universidad Nacional de La Plata - Department of Economics ( email )

1900 La Plata, Buenos Aires 1900
Argentina

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