Macroeconomic policies and financial shocks in dollarized economies

Sommaire

Acknowledgements xiii
General Introduction xv
1 Fiscal and exchange rate policies during the Argentine and Uruguayan crises of 2001-2002 1
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Main explanations of the Argentine and Uruguayan crises . . . . . 2
1.2.1 Internal vulnerabilities. The balance sheet approach . . . . . 3
Dollarized balance sheets . . . . . . . . . . . . . . . . . . . . 3
1.2.2 Internal vulnerabilities. The role of macroeconomic policies 4
Fixed exchange rate regime . . . . . . . . . . . . . . . . . . . 4
Procyclical and non sustainable fiscal policies . . . . . . . . 5
1.2.3 External factors . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Capital inflows and sudden stops . . . . . . . . . . . . . . . 6
Lack of coordination inside the Mercosur process . . . . . . 6
1.3 Before the crisis. Argentina and Uruguay during the 1990's . . . . . 6
1.3.1 Monetary and exchange rate policy . . . . . . . . . . . . . . 7
The stabilisation plans . . . . . . . . . . . . . . . . . . . . . . 7
Real exchange rate appreciation . . . . . . . . . . . . . . . . 8
1.3.2 Fiscal policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Procyclicality of fiscal policies . . . . . . . . . . . . . . . . . . 9
Public debt dynamics in Argentina and Uruguay . . . . . . 10
Fiscal sustainability in Argentina and Uruguay . . . . . . . 12
Differences in reputation . . . . . . . . . . . . . . . . . . . . 14
1.3.3 Financial vulnerabilities in Argentina and Uruguay . . . . . 15
Currency substitution . . . . . . . . . . . . . . . . . . . . . . 15
Other related vulnerabilities . . . . . . . . . . . . . . . . . . . 16
1.3.4 A decade of regional integration and growth . . . . . . . . . 17
1.4 The crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1.4.1 The beginning of the recession . . . . . . . . . . . . . . . . . 18
The capital flows reversal . . . . . . . . . . . . . . . . . . . . 18
The Brazilian devaluation . . . . . . . . . . . . . . . . . . . . 19
1.4.2 Activity drop . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.4.3 Exchange rate and fiscal policies . . . . . . . . . . . . . . . . 21
1.4.4 Financial deterioration . . . . . . . . . . . . . . . . . . . . . 23
1.5 Collapse and Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.5.1 The final stage . . . . . . . . . . . . . . . . . . . . . . . . . . 24
The end of the convertibility . . . . . . . . . . . . . . . . . . 24
The end of the Uruguayan peg . . . . . . . . . . . . . . . . . 26
1.5.2 Public debt restructuring process . . . . . . . . . . . . . . . 27
Argentina's Sovereign Debt Restructuring . . . . . . . . . . 27
Uruguay’s Sovereign Debt Restructuring . . . . . . . . . . . 28
1.5.3 Monetary and fiscal policies after crisis resolution . . . . . . 29
1.5.4 Some considerations about the crisis . . . . . . . . . . . . . 32
External shocks and internal vulnerabilities . . . . . . . . . 32
The crisis resolution . . . . . . . . . . . . . . . . . . . . . . . 33
1.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
1.7 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
1.7.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
1.7.2 Condition for Fiscal sustainability . . . . . . . . . . . . . . . 37
1.7.3 Testing fiscal sustainability in Argentina and Uruguay . . . 38
2 External and domestic shocks during the Argentine Convertibility and its collapse 43
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.2 Modelling strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2.2.1 A basic model . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2.2.2 Structural shocks . . . . . . . . . . . . . . . . . . . . . . . . . 47
External shocks . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Domestic shocks . . . . . . . . . . . . . . . . . . . . . . . . . 48
2.2.3 Local projections . . . . . . . . . . . . . . . . . . . . . . . . . 49
2.2.4 Historical decomposition . . . . . . . . . . . . . . . . . . . . 50
2.3 Estimation and results . . . . . . . . . . . . . . . . . . . . . . . . . . 50
2.3.1 Preliminary analysis . . . . . . . . . . . . . . . . . . . . . . . 50
2.3.2 Identification of shocks: VAR analysis . . . . . . . . . . . . . 51
2.3.3 Impulse response functions: Local projections . . . . . . . . 53
2.3.4 Historical decomposition . . . . . . . . . . . . . . . . . . . . 55
2.3.5 Episode analysis . . . . . . . . . . . . . . . . . . . . . . . . . 56
Tequila crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Russian crisis and Brazilian devaluation . . . . . . . . . . . . 57
End of Convertibility . . . . . . . . . . . . . . . . . . . . . . . 58
2.4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
2.5 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
2.5.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
External series . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Domestic series . . . . . . . . . . . . . . . . . . . . . . . . . . 62
2.5.2 Historical decomposition . . . . . . . . . . . . . . . . . . . . 64
2.5.3 ADF test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
2.5.4 Benchmark variables. Convertibility period . . . . . . . . . . 66
3 Balance sheets and fiscal and exchange rate policies 67
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.2 The model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.2.1 Private sector . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.2.2 Public Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
3.3 Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3.4 Financial shocks and macroeconomic policies . . . . . . . . . . . . . 74
3.4.1 The case of flexible exchange rates and neutral fiscal policy . 75
A flexible exchange rate regime . . . . . . . . . . . . . . . . . 75
The neutral fiscal policy case (FRB, aG = 0) . . . . . . . . . . 78
3.4.2 Other exchange rate and fiscal regimes . . . . . . . . . . . . 80
Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Different fiscal rules (aG 6= 0) . . . . . . . . . . . . . . . . . . 82
Different exchange rate regimes . . . . . . . . . . . . . . . . 86
The dynamic effects of a financial shock under different regimes 89
3.5 Welfare analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
3.5.1 Optimality of flexible exchange rates in the neutral fiscal policy case 90
3.5.2 Optimal fiscal and exchange rate policies . . . . . . . . . . . 91
Optimality under the baseline specification . . . . . . . . . . 91
Optimality under other specifications . . . . . . . . . . . . . 94
3.5.3 Optimality of countercyclical fiscal policy . . . . . . . . . . . 97
3.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
3.7 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
3.7.1 Determinacy of equilibrium. The case of two predetermined variables and one non predetermined  99
3.7.2 Corporate risk premium and Steady State . . . . . . . . . . . 101
3.7.3 Steady State. determinacy of equilibrium . . . . . . . . . . . 103
3.7.4 Effects of a financial shock on real depreciation and investment105
3.7.5 The dynamics after the shock under flexible exchange rates 106
3.7.6 The dynamics after the shock under fixed exchange rates . 108
3.7.7 Effects of a financial shock on taxes and labor . . . . . . . . 110
3.7.8 A second order approximation to the utility function . . . . 111
3.7.9 Endogenous sovereign risk . . . . . . . . . . . . . . . . . . . 112
3.7.10 Optimal policy combinations with endogenous sovereign risk mG = 0.02 and vulnerability  113
Bibliography 115