Tango with the Gringo: the Hard Peg and Real Misalignment in Argentina
Between 1990 and 2001 the Argentine peso appreciated by 80 percent in real terms, and its overvaluation has been singled out as one of the main suspects in the debate on the causes of the Argentina collapse of late 2001. This paper assesses the deg...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2004/06/4980119/tango-gringo-hard-peg-real-misalignment-argentina http://hdl.handle.net/10986/14004 |
| Summary: | Between 1990 and 2001 the Argentine peso
appreciated by 80 percent in real terms, and its
overvaluation has been singled out as one of the main
suspects in the debate on the causes of the Argentina
collapse of late 2001. This paper assesses the degree of
real misalignment in Argentina over the Convertibility
period using a model in which the equilibrium real exchange
rate is defined as the value consistent with (i) a balance
of payments position where any current account imbalance is
financed by a sustainable flow of international capital
(external equilibrium), and (ii) traded/nontraded sector
productivity differentials (internal equilibrium). Empirical
implementation of the model suggests that the initial real
appreciation of the peso, between 1990 and 1993, was
consistent with the productivity increases that Argentina
enjoyed following the stabilization of the economy after the
hyperinflation of the late 1980s. But after 1996 a widening
gap opened between the observed real exchange rate and that
consistent with a sustainable net foreign asset position.
Our estimates indicate that in 2001 the peso was overvalued
by over 50 percent. The model allows us to assess how much
of the overvaluation resulted from Argentina's
inadequate choice of anchor currency and how much from a
divergence of fundamentals between the U.S. and Argentina,
ultimately due to the maintenance of policies inconsistent
with the peg. We find that both factors played a role in the
overvaluation accumulated between 1977 and 2001 that
preceded the collapse of the Convertibility regime. |
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