Stephen Morris Blogs

Don't Cry For Me Argentina: Currency Crises and Financial Integration

(University of San Francisco Research Colloquia) Permanent link   All Posts

*When: May 12, Thu, 11:45 AM - 12:45 PM
*Where: MH 230

Title: Don't Cry For Me Argentina: Currency Crises and Financial Integration
This paper examines the impact of monetary policy and exchange rate regimes, and crises, on the country risk of Argentina’s stock market. We employ a time-varying beta model of country risk to infer how Argentina’s country risk was impacted by currency and financial changes as well as financial integration over the period 1980–2008. Argentina represents a unique case study as an emerging market with a long data series that includes multiple exchange rate regimes (floating, fixed, floating), monetary policy regimes (hyperinflation, currency board, rising inflation) along with a significant currency and financial crisis between the fixed to flexible exchange rate regimes. This crisis, which involved a failed currency board, debt repudiation, and financial expropriation, occurs early enough in the dataset for us to investigate its impact on the country risk of Argentina’s stock market. This paper thus provides an opportunity to investigate the economic factors affecting Argentina’s county risk both pre- and post- financial integration and pre- and post-financial crisis. Our results suggest that Argentina’s decision to move to a fixed exchange rate (a currency board) resulted in a significant, and expected, change in the economic variables that determined its country risk. This change is consistent with the timing of full financial integration for Argentina found in Goldberg and Delgado(2001). The later collapse of Argentina’s currency board, with it’s attendant financial crisis, produce a significant reversion in the economic variables impacting Argentina’s country risk. Our results suggest that Argentina’s exchange rate, the main factor pre-financial integration, resurfaces as an important determinant of changing country risk after the currency and financial crisis of 2001. 

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