IMF research suggests nature of currency crises may have changed in 1990s

• Pages: 46-47

Page 46

The growing frequency of currency crises in the 1990s has prompted researchers to look at the causes of these crises, but surprisingly little attention has been paid to possible changes in the character of these crises. In Has the Nature of Crises Changed? Nada Choueiri and Graciela Kaminsky examine the experience of Argentina, a country that has weathered seven major currency crises over the past quarter century. They conclude that crises in the 1970s and 1980s were chiefly the product of domestic and external monetary and fiscal policies but that spillover from crises elsewhere played an important role in the 1990s.

Crises chronology

Over the past 25 years, Argentina has been affected by virtually every major instance of international financial turmoil and several solely domestic crises. The country’s experience makes it a key case study. Using data from the past quarter century and adapting their macroeconomic model to Argentina’s two principal exchange rate regimes, Choueiri and Kaminsky examine seven stabilization plans and the crises that unraveled all but the most recent plan. The seven plans were Gelbard (1973– 75), Tablita (1978–81), Alemann (1981–82), Austral (1985–87), Primavera (1988–89), BB (1989–90), and Convertibility (1991–present).

Plagued by chronic inflation through much of its post–World War II economic history, Argentina alternated between a unified fixed exchange rate system, with full convertibility for both current and capital account transactions, and a dual exchange rate, with a fixed-rate system for current account transactions and a floating rate for capital account transactions. The authors’ model captures the stylized features of both systems. Under a unified fixed exchange rate regime, the authorities set a predefined goal for domestic credit and abandoned the fixed rate if it hindered discretionary monetary policy. Investors, aware that the two goals might collide, expect the peg to be abandoned once reserves are exhausted.

A variety of shocks could drain reserves. The model formulated by the authors allows for monetary shocks (both money demand and money supply shocks) and external shocks (originating from world interest rate charges and contagion effects). To capture the dual exchange rate regime, the authors introduce a financial market premium (a barometer for policy credibility) that increases with expansionary domestic monetary...