THE ARGENTINEAN CURRENCY CRISIS: A MARKOV-SWITCHING MODEL ESTIMATION

Patricia Alvarez-Plata · Mechthild Schrooten

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Economic Theory and Policy

Abstract

In 2002, the Argentinean currency board came to a sudden and dramatic end. Although the country had been suffering from weak economic fundamentals for years, the timing and severity of the currency crisis surprised most observers. The present study analyzes the role of fundamentals and self-fulfilling speculation in the Argentinean crisis. Arguing within a theoretical model of a fixed exchange rate system that allows for multiple equilibria, we show that the crisis, although associated with weak fundamentals, cannot be explained by these macroeconomic factors alone. Estimating a univariate Markov-switching model, the current study shows that shifts in agents’ beliefs did indeed also play a crucial role.

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1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1999The Twin Crises: The Causes of Banking and Balance-of-Payments Problems 1979A Model of Balance-of-Payments Crises 1999State-Space Models with Regime Switching 1995Exchange Market Mayhem: The Antecedents and Aftermath of Speculative Attacks 2000State-Space Models with Regime-Switching: Classical and Gibbs Sampling Approaches with Applications 1995Models of Currency Crises with Self-Fulfilling Features 1984Rational and Self-Fulfilling Balance-of-Payments Crises

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