Role of Convertibility, Argentinian Crisis
Convertibility definitely succeeded in blocking running hyperinflation and developing a financial sector that before was almost non-existent. Nonetheless its maintenance during the decade turned out to be counter-productive because its consequences partly caused the crisis which from 1999 to 2002 hit Argentina. In particular there are three aspects which played a significant role.
First of all the overvaluation of the Peso, especially after 1999, worsened the current account, determining an increase in the already high level of unemployment. Secondly, the limitations imposed by convertibility made impossible for the Central Bank to act as lender of last resort and rescue the government and the banks, which had been forced to increase their exposure to Argentinian bonds. Finally, the expectations that convertibility generated continuously brought to "double the bet" and stay with that regime until it was no more possible to sustain it.
[...] On the other side it turned out to be one of the reasons of the subsequent collapse. It was part of it in different ways, as it could not be different since it was such a pervasive measure. The first role it had in the collapse was its impact on the exchange rate. Leading to an excessively overvalued peso, the peg caused a loss of competitiveness especially after the Brazilian devaluation. This caused an increase in an already rampant unemployment rate and the impossibility to fix the current account. [...]
[...] M. (1995). Argentina's Miracle? From Hyperinflation to Sustained Growth. Galiani, S., Heymann, D., & Tommasi, M. (2003). Great Expectations and Hard Times: The Argentine Convertibility Plan. Gatto, S. (1994-‐2002). America Latina: il decennio cruciale: cornoache d'estremo occidente. [...]
[...] To conclude, convertibility definitely had a huge role on the 2001 Argentinian Crisis. Nonetheless it makes no sense to blame an economic provision as guilty of such a big crisis. Convertibility was only an element of it and, probably, if better managed could have not been. There are many alternatives on how it was possible, from an anticipated exit to a complete dollarization or even just a partial dollarization. It's difficult to know which option would have been better. What is sure is that a series of wrong choices lead to an economic disaster whose consequences Argentina is still facing nowadays www.oboolo.com REFERENCES Alberola, E., Lopez, H., & Servén, L. [...]
[...] The sustainability of the debt was uncertain. Interest rates rose. Unemployment rose. GDP contracted. Suddenly the situation was not manageable anymore and in a few years Argentina arrived at default and finally to a forced devaluation. Hence, during the decade of convertibility expectations had a kind of “combustible effect”. They made appear the situation better than it was, considering convertibility as durable regime and most 20 www.oboolo.com of all considering the initial growth and prosperity as something that would have continued for a long period, hiding the negative signals that emerged. [...]
[...] The process would continue up to the point in which the central bank restore the desired exchange rate. (Krugman, Obstfeld, & Melitz, 2012) 7 www.oboolo.com A very important implication of the fixed exchange rate is that the Central bank cannot in anyway increase the money supply to boost the economy because the effect would be a depreciation of the currency, and as a consequence the end of the peg. The only possible action is to operate on the fiscal policy. [...]
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