Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons

Guillermo A. Calvo, Alejandro Izquierdo, Ernesto Talvi

NBER Working Paper No. 9828
Issued in July 2003
NBER Program(s):   IFM

We offer an alternative explanation for the fall of Argentina's Convertibility Program based on the country's vulnerability to Sudden Stops in capital flows. Sudden Stops are typically accompanied by a substantial increase in the real exchange rate that breaks havoc in countries that are heavily dollarized in their liabilities, turning otherwise sustainable fiscal and corporate sector positions into unsustainable ones. In particular, we stress that the required change in relative prices is larger the more closed an economy is in terms of its supply of tradable goods. By contrasting Argentina's performance relative to other Latin American countries that were also subject to the Sudden Stop triggered by the Russian crisis of 1998, we identify key vulnerability indicators that separated Argentina from its piers. We also provide an explanation for the political maelstrom that ensued after the Sudden Stop, based on a War of Attrition argument related to the wealth redistribution conflict triggered by the Sudden Stop and fiscal collapse. This framework also provides elements to rationalize the banking crisis that accompanied the fall of Convertibility.

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Document Object Identifier (DOI): 10.3386/w9828


  • Alexander V., Mélitz J., von Furstenberg G.M. (eds.) Monetary Unions and Hard Pegs. Oxford, UK: Oxford University Press, June 3, 2004. p. 151-182 ,
  • Calvo, Guillermo. Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy? Cambridge, MA: MIT Press, 2005. p. 143-180 ,
  • Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2006. "Sudden Stops and Phoenix Miracles in Emerging Markets," American Economic Review, American Economic Association, vol. 96(2), pages 405-410, May.

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