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Argentina: Trying to Make Sense of the Financial Tango
TL;DR: In this paper, the authors discussed and revisited some of the most popular stories behind the 2001 financial crisis in Argentina, i.e., the prolonged overvaluation of the peso owing to the Currency Board arrangement, the lack of fiscal adjustment, and the negative external environment which triggered a "sudden stop" of capital inflows.
Abstract: The paper discusses and revisits some of the most popular stories behind the 2001 financial crisis in Argentina, i.e. the prolonged overvaluation of the peso owing to the Currency Board arrangement, the lack of fiscal adjustment, and the negative external environment which triggered a “sudden stop” of capital inflows. In doing so, the paper surveys and attempts to make sense of the contradictory theories and explanations surrounding these different stories. It also tries to shed some light on one possible missing link, that is the growth performance during the Convertibiity period. Finally, the paper discusses some important policy issues pertaining to the effects of global financial integration, such as capital account opening, exchange rate policies, alternatives to debt financing and the role of the international financial institutions. The central message is that the very nature of the Argentine crisis was not fundamentally different from the pattern of inconsistent macroeconomic policies which triggered many of the speculative attacks against the Peso in the 1970s and the 1980s. Although the problem was for once not monetary, the time inconsistency problem of the exchange rate policy followed between 1991 and 2001, together with the lack of nationally coherent fiscal and development policies, led to a classic debt solvency trap. From this perspective, the 2001 default does not provide for a new “type” of crisis, although crisis management. This being said, the real sector of the economy during the 1990s is certainly one of the most overlooked elements in the crisis, and certainly led to overoptimistic expectations about the capacity of the Argentine economy to rebound.
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TL;DR: The authors argued that the preponderance of theoretical reasoning and empirical evidence suggests a positive first-order relationship between financial development and economic growth, and that financial development level is a good predictor of future rates of economic growth.
Abstract: The author argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth. There is evidence that the financial development level is a good predictor of future rates of economic growth, capital accumulation, and technological change. Moreover, cross-country, case-style, industry level and firm-level analysis document extensive periods when financial development crucially affects the speed and pattern of economic development. The author explains what the financial system does and how it affects, and is affected by, economic growth. Theory suggests that financial instruments, markets and institutions arise to mitigate the effects of information and transaction costs. A growing literature shows that differences in how well financial systems reduce information and transaction costs influence savings rates, investment decisions, technological innovation, and long-run growth rates. A less developed theoretical literature shows how changes in economic activity can influence financial systems. The author advocates a functional approach to understanding the role of financial systems in economic growth. This approach focuses on the ties between growth and the quality of the functions provided by the financial systems. The author discourages a narrow focus on one financial instrument, or a particular institution. Instead, the author addresses the more comprehensive question: What is the relationship between financial structure and the functioning of the financial system?
5,967 citations
"Argentina: Trying to Make Sense of ..." refers background or result in this paper
...53 See EDISON, LEVINE et al. [2002]. 54 See KOSE et alt....
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...53 See EDISON, LEVINE et al. [2002]....
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...53 See EDISON, LEVINE et al. [2002]. 54 See KOSE et alt. [2003]. The results of the study show that although , on average, the volatility of output growth has, on average, decline in the 1990s relative to the three earlier decades, the volatility of consumption growth relative to output income growth has increased for more financially integrated developing countries in the 1990s....
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...This is actually what happened in the aftermath of most banking crises in the past, especially in Latin America, as illustrated by a recent empirical study, which finds that financial 52 See EDISON, KLEIN et al. [2002] for a survey of the empirical literature to date, or MALHOTRA[1997]....
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Book•
01 Jan 1978
TL;DR: In this article, the authors discuss the history of the financial crisis and its role in economic and monetary instability, including speculative manias, economic booms, and international contagion, and the international lender of last resort.
Abstract: 1. Financial Crisis: A Hardy Perennial 2. Anatomy of a Typical Crisis 3. Speculative Manias 4. Fueling them Flames: The Expansion of Credit 5. The Critical Stage: Pricking the Bubble 6. Euphoria and Economic Booms 7. International Contagion 8. Bubble Contagion: Tokyo to Bangkok to New York 9. Swindles and Theft and Bad Manners 10. Policy Responses: Letting It Burn Out 11. Lenders of Last Resort: The Domestic Responses 12. The International Lender of Last Resort 13. Conclusion The Lessons of History
3,357 citations
01 Jan 1998
TL;DR: This paper pointed out that the failure of a loan usually represents miscalculations on both sides of the transaction or distortions in the lending process itself, which is odd, since a loan agreement invariably has two parties.
Abstract: "HISTORY," JAWAHARLAL NEHRU famously observed, "is almost always written by the victors. " I Financial history, it seems, is written by the creditors. When a financial crisis arises, it is the debtors who are asked to take the blame. This is odd, since a loan agreement invariably has two parties. The failure of a loan usually represents miscalculations on both sides of the transaction or distortions in the lending process itself. The East Asian financial crisis has so far been true to form. As soon as the crisis hit in mid-1997, the International Monetary Fund (IMF), which led the official international response, assigned primary responsibility to the shortcomings of East Asian capitalism, in particular, the East Asian financial markets. The IMF's principal strategy for the three countries hardest hit-Indonesia, Korea, and Thailand-was to overhaul their financial systems. The basic diagnosis was that East Asia had exposed itself to financial chaos because its financial systems were riddled by insider dealing, corruption, and weak corporate governance,
1,545 citations
TL;DR: This paper analyzed the adjustment dynamics of real exchange rates through impulse response analysis and found that the dynamic response pattern suggests that the shock response is initially amplified before dissipating and that such non-monotonic dynamics can contribute to more than one-third of the observed persistence of the real exchange rate.
1,390 citations
TL;DR: A new way of estimating common long-memory components of a cointegrated system is proposed by imposing that they be linear combinations of the original variables Xt , and that the error-correction terms do not cause the common factors at low frequencies.
Abstract: The study of cointegration in large systems requires a reduction of their dimensionality. To achieve this, we propose to obtain the I(1) common factors in every subsystem and then analyze cointegration among them. In this article, a new way of estimating common long-memory components of a cointegrated system is proposed. The identification of these I(1) common factors is achieved by imposing that they be linear combinations of the original variables Xt , and that the error-correction terms do not cause the common factors at low frequencies. Estimation is done from a fully specified error-correction model, which makes it possible to test hypotheses on the common factors using standard chi-squared tests. Several empirical examples illustrate the procedure.
1,322 citations
"Argentina: Trying to Make Sense of ..." refers background in this paper
...As documented in OBSFELD & ROGOFF [1995] and confirmed by the Argentine tragedy, aside from a few minor tourist economies, oil sheikdom and heavily dependent principalities, few fixed exchange rates have survived the past several years intact(58)....
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