A counterfactual analysis of the Argentinian monetary transformation in 2002

Abstract

A hard peg restored economic stability in Argentina during the nineties but made it also vulnerable to real shocks in so far as the economy was highly dollarized. A devaluation in 1998 in Brasil, its main partner, damaged the Argentinian competitiveness and resulted in a fall in export demand. There was a need for a real adjustment but removing the peg would have implied large balance sheet effects and raised serious financial issues. This article endeavours to learn a lesson about the aftermath of hard peg regime from the Argentinian experience. It is based on a dynamic macroeconomic model to assess the impact of three scenarios, already suggested in the literature. Two hypothetical, a floating regime and dollarization and one which was actually implemented in 2002, the pesification of the whole economy. The simulations suggest that pesification was the only scenario with unambiguous expansionary effects.

Acknowledgements

I am grateful to D. Heymann for his insightful comments during my stay in Cepal Buenos Aires in December 2004 as well as the members of the examining board of my Ph D defence. Financial support from the Caisse des Dépôts et Consignations is gratefully acknowledged.

Notes

¹ Except for deposits that were converted at 1 to 1.4 rate (this asymmetric conversion was compensated in the banking sector by a special public bond denominated in dollars).

² δ(1 + ρ) < 1 is required for convergence of the economy to its steady state.

³ Baldi-Delatte (2006) analyses the factors for such dynamics in a cointegration analysis of the prices dynamics in Argentina over 1994–2004.

⁴ For the sake of simplicity, the model assumes that the home good share in the production of capital and in the consumption index, γ is the same while in reality these fractions are significantly different (40 and 15% respectively). I set γ to equal the share of imported goods in the production of capital because its price is the most relevant since the dynamics of the model lay down in the dynamics of capital.

⁵ In the basic RBC model the labour supply elasticity is four. Yet King and Rebello (1999) highlight that empirical evidence on variation in hours worked is very different from the elasticity built in RBC model and usually provide lower than unity elasticity.

⁶ The analysis of the equilibrium is made under the assumption that the financial contracts are denominated in dollars and the real contracts in pesos. The results of the analysis hold for a total dollarized economy (only replace P by S everywhere).

⁷ See Appendix p.35 in Cespedes et al. 2000 (Working Paper version of the AER 2004).