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Fiscal and exchange rate policies during the Argentine and Uruguayan crisis of 2001-2002

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  • José Mourelle

    (Banco Central del Uruguay)

Abstract

In this paper we study the Argentine and Uruguayan crisis of 2001-2002 with emphasis in the role played by the exchange rate and fiscal policies followed by the two countries. We find that in both cases the crisis can be understood as the result of an adverse external shock in a vulnerable environment. This environment was characterized by a perverse combination of fixed exchange rate, a fiscal policy not sustainable in a strong sense, and a great de facto dollarization. The Uruguayan peg was more flexible which facilitated a more gradual adjustment of the real exchange rate. Uruguay enjoyed better credit conditions during recession which derived in a different public debt dynamics. By testing cointegration between government expenditures and revenues we find that fiscal policy was not sustainable in a strong sense in Argentina and Uruguay which favored the speculative attacks suffered by the public debt of both countries. We find no clear difference in terms of fiscal sustainability between Uruguay and Argentina. Different credit conditions seem to reflect a different reputation.

Suggested Citation

  • José Mourelle, 2010. "Fiscal and exchange rate policies during the Argentine and Uruguayan crisis of 2001-2002," Documentos de trabajo 2010012, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2010012
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    References listed on IDEAS

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    More about this item

    Keywords

    crisis; Argentina; Uruguay; country risk; fixed exchange rates; fiscal sustainability; dollarization;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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