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The Role of Convertibility in the 1999-2002 Argentinian Crisis

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  1. Introduction
  2. The economic transformation of the '1990s: the convertibility plan
  3. One-to-one convertibility: an example of a fixed exchange rate.
  4. How convertibility turned into a problem
    1. The overvaluation of the Peso.
  5. Conclusions

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. [...]


[...] Clearly the devaluation had really different impacts in the 2 countries, with U.S. almost indifferent, while Argentina saw its competitiveness being threatened, considering that Brazil was also one of the major exports competitor. The last factor is a very simple one. Being the peso pegged with the dollar, a misalignment of the dollar would cause an identic effect on the peso. That's exactly what happened in the second part of the 1990's, when, especially after 1997, the dollar was overvalued and, as a consequence, contributed to the overvaluation of the peso, too. [...]


[...] (2011, May 2011). Taken from El Ruido de las Nueces: http://www.elruidodelasnueces.com.ar/?p=4067 Perry, G., & Serven, L. (2003). The Anatomy of a Multiple Crisis. World Bank. Pettinger, T. (2012, June 18). Argentina Crisis and Recovery. [...]


[...] The devaluation was responsible for the more than half of the increase in 1999. On the contrary, the trade structure, in other years, played a different role. According to the econometric model by Alberola, Lopez and Servén it has even had an undervaluing effect, in particular between 1994 and 1998, mainly as a result of the overvaluation of the brazilian Real. In a sense, it was exactly the opposite situation to the one faced after 1999. For what concerns the dollar overvaluation it is possible to observe that it started having weight in 1996, exactly at the beginning of its overvaluation and it kept playing a part until the end of convertibility. [...]

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