What Can We Learn From the Current Crisis in Argentina? Timothy J. Kehoe University of Minnesota and Federal Reserve Bank of Minneapolis June 2003 www.econ.umn.edu/~tkehoe
The economy of Argentina finds itself submerged in a great depression that, even if though began four s ago, deepened after mid 2001 with average quarterly falls of deseasonalized GDP with respect to the previous quarter of 5 percent for the last two quarters of 2001 and the first of 2002. This violent deepening of the recession occurred just at the moment that economic agents, almost universally, became convinced of the impossibility of sustaining the Convertibility Plan. Dirección Nacional de Coordinación de Políticas Macroeconómicas, Secretaría de Política Económica (2002)
What Happened in Argentina in 2001-2002? The Brazilian devaluation did not lead to problems for the Argentinian current account both exports and the trade surplus in fact grew. March 16 2001: President De la Rúa rejected the plan presented by the Minister of the Economy, Ricardo López Murphy, to reduce the fiscal deficit. After López Murphy s resignation, De la Rúa appointed Domingo Cavallo, the architect of the Convertibility Plan during the first Menem administration, as Minister of the Economy.
Cavallo presented a new economic plan in the lower house of Argentina s congress. On 28 March 2001, the congress refused to allow Cavallo to cut government salary and pension costs, and the government sold debt to cover the deficit. Cavallo s alternative: La Ley de Déficit Cero (Zero Deficit Act): Quasi Monies. In December 2001, the government defaulted on its debt and, in January 2002, it abandoned the Convertibility Plan.
Money Market Interest Rates 50 40 percent per 30 20 pesos deposits 10 dollar deposits 0 1991 1993 1995 1997 1999 2001 2003
Trade in Goods and Services 30 25 exports percent GDP 20 15 10 imports 5 0 1990 1992 1994 1996 1998 2000 2002
Inward Foreign Direct Investment 14 12 Chile 10 percent GDP 8 6 4 2 Argentina 0 1990 1992 1994 1996 1998 2000 2002
Overall Government Balance (Including Off Budget Items) 4 2 percent GDP 0-2 -4-6 -8 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Argentina External Debt/GDP 175 150 125 percent 100 75 50 25 0 1986 1988 1990 1992 1994 1996 1998 2000 2002
Argentina-U.S. Real Exchange Rate 1.00 0.80 0.60 rer log(rer) 0.40 0.20 0.00-0.20 rern -0.40 1986 1988 1990 1992 1994 1996 1998 2000 2002
Great Depressions of the Twentieth Century Project Use growth accounting and applied dynamic equilibrium models to reexamine great depression episodes: United Kingdom (1920s and 1930s) Cole and Ohanian Canada (1930s) Amaral and MacGee France (1930s) Beaudry and Portier Germany (1930s) Fisher and Hornstein Italy (1930s) Perri and Quadrini Argentina (1970s and 1980s) Kydland and Zarazaga Chile and Mexico (1980s) Bergoeing, Kehoe, Kehoe, and Soto Japan (1990s) Hayashi and Prescott (Review of Economic Dynamics, January 2002 revised and expanded version forthcoming as Minneapolis Fed volume)
Lessons from Great Depressions Project The main determinants of depressions are not drops in the inputs of capital and labor stressed in traditional theories of depressions but rather drops in the efficiency with which these inputs are used, measured as total factor productivity (TFP). Exogenous shocks like the deteriorations in the terms of trade and the increases in foreign interest rates that buffeted Chile and Mexico in the early 1980s can cause a decline in economic activity of the usual business cycle magnitude. Misguided government policy can turn such a decline into a severe and prolonged drop in economic activity below trend a great depression.
Applied dynamic general equilibrium model The representative consumer maximizes t log (1 )log( ) t = β γ C 1980 t+ γ hnt Lt subject to Ct + Kt +1 Kt= wl t t+ ( rt δ ) Kt. Feasibility: α 1 α t t+ 1 t t t t. C + K ( 1 δ ) K = AK L
Argentina: Real GDP per working age person 11.67 800 10.67 400 index (1900=100) 9.67 200 8.67 100 7.67 50 1900 1920 1940 1960 1980 2000
Real GDP Per Working Age Person and Total Factor Productivity 130 120 GDP index (1970=100) 110 100 90 TFP 80 1970 1974 1978 1982 1986 1990 1994 1998 2002
First order conditions: Calibration 1 C t 1 β = F1+ r I t C HG δ K J t γ γ w = hn L C 1 t t t t. Estimate β =096., γ =0.30 1960-1970 data.
Model with Adjustment Costs where C + X = AK L 1 t t t t α t α K = (1 δ ) K + φ( X / K) K + 1 t t t t t ( X/ K) 1 η( X/ K) η φ = δ + ( η 1) δ / η. For 0< η 1, φ '( X/ K) > 0, φ''( X/ K) 0, φ( δ) = δ, φ'( δ ) = 1. The model without adjustment costs is the special case η = 1. In numerical experiments η = 0.8. Should we model rigidity in the labor market (instead)?
Real GDP per Working- Age Person Base Case Model Model with Adjustment Costs 150 150 140 model 140 130 130 model index (1970=100) 120 110 100 data index (1970=100) 120 110 100 data 90 90 80 1970 1974 1978 1982 1986 1990 1994 1998 2002 80 1970 1974 1978 1982 1986 1990 1994 1998 2002
Hours Worked per Working-Age Person Base Case Model Model with Adjustment Costs 28 28 26 26 data hours per week 24 data hours per week 24 model 22 model 22 20 1970 1974 1978 1982 1986 1990 1994 1998 2002 20 1970 1974 1978 1982 1986 1990 1994 1998 2002
Capital-Output Ratio Base Case Model Model with Adjustment Costs 3.6 3.6 data 3.2 3.2 ratio 2.8 data ratio 2.8 2.4 2.4 model model 2.0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2.0 1970 1974 1978 1982 1986 1990 1994 1998 2002
Investment Rate Base Case Model Model with Adjustment Costs 0.30 0.30 0.25 0.25 data data investment/gdp 0.20 0.15 0.10 investment/gdp 0.20 0.15 0.10 model model 0.05 0.05 0.00 1970 1974 1978 1982 1986 1990 1994 1998 2002 0.00 1970 1974 1978 1982 1986 1990 1994 1998 2002
Mexico: 1988-2000 One-sector growth model t maximize β [ γ log C + (1 γ)log( hn L) ] t= 1988 t t t subject to C + K 1 K = wl + (1 τ )( r δ ) K + T X feasibility constraint t t+ t t t t t t t t C + K 1 (1 δ ) K + X = AK L. α 1 t t+ t t t t t A t and X t are treated as exogenous.
Real GDP per Working Age (15-64) person and TFP in Mexico 115 110 1988=100 105 100 GDP 95 TFP 90 1988 1990 1992 1994 1996 1998 2000
no tax reform constant trade balance 120 120 110 100 data 110 100 data model 90 model 90 80 1988 1990 1992 1994 1996 1998 2000 80 1988 1990 1992 1994 1996 1998 2000 120 trend TFP 120 taxes/trade balance/tfp model 110 110 model 100 100 data data 90 90 80 1988 1990 1992 1994 1996 1998 2000 80 1988 1990 1992 1994 1996 1998 2000
REAL EXCHANGE RATE RER NER P us P ar units : pesos dollar dollars/u.s. basket pesos/argentine basket Argentine baskets U.S. basket Suppose P ar NER P T us (law of one price) T T RER N P T ar P us P us/p us PT us P ar P ar /P ar RER N is the part of the real exchange rate explained by the relative price of nontraded goods.
What is left over in RER is the real exchange rate for traded goods: Notice that RER T NER P T us T P ar RER RER T RER N log RER log RER T log RER N rer rer T rer N TRADED Agriculture, Mining and Petroleum, and Manufacturing NONTRADED Construction and Services
Mexico-U.S. Real Exchange Rate 110 100 1988=100 90 80 RERN 70 RER 60 1988 1990 1992 1994 1996 1998 2000
MODEL Consumers max t 0 t c Tt n t 1 c Nt n t 1 / subject to p Tt c Tt p Nt c Nt a t 1 w t t 1 r t a t T t a t A where a t q t 1 k t b t, k 0, b 0 given Here t is working-age population and n t 0.5 t 0.5pop t is adult-equivalent population.
Production functions Domestically produced traded good y Dt min z TD /a TD, z ND /a ND, A D k D Dt Dt Nontraded good y Nt min z TN /a TN, z NN /a NN, A N k N Nt Nt 1 D 1 N Investment good i t Gz TIt 1 z NIt Armington aggregator y Tt M x Dt 1 m t 1/
Market clearing Domestically produced traded good x Dt x Ft y Dt Composite traded good c Tt z TIt z TDt z TNt y Tt Nontraded good c Nt z NIt z NDt z NNt y Nt Investment good k t 1 1 k t i t Factor markets k Dt k Nt k t, Dt Nt t
Balance of payments m t b t 1 p Dt x Ft 1 r t b t Foreign demand x Ft D 1 Ft p Dt 1 1 Transfer of tariff revenue T t Dt m t
Profit maximization Domestically produced traded good w t p Dt a TDt p Tt a NDt p Nt A D 1 D k Dt / Dt D 1 r t p Dt a TDt p Tt a NDt p Nt A D D Dt /k Dt 1 D 1 q t /q t 1 Nontraded good w t p Nt a TNt p Tt a NNt p Nt A N 1 N k Nt / Nt N 1 r t p Nt a TNt p Tt a NNt p Nt A N N Nt /k Nt 1 N 1 q t /q t 1
Investment good p Tt q t G z NIt /z TIt 1 p Nt q t 1 G z TIt /z NIt Armington aggregator p Dt p Tt M c Tt z Tt x Dt 1 1 Dt p Tt 1 M c Tt z Tt m t 1 where p Tt 1/M 1 1 1 pdt 1 1 1 1 Dt 1 1
CAPITAL ADJUSTMENT FRICTIONS i Dt 1 i Nt 1 Gz 1 Tt z Nt k Dt 1 i Dt 1 /k Dt k Dt 1 k Dt k Nt 1 i Nt 1 /k Nt k Nt 1 k Nt i/k 0, i/k 0,, 1 i/k 1 i/k 1 /, 0 1 Adjusting the sector specific capital stock rapidly is costly. Capital in the traded goods sector has a different price, q Dt, than capital in the nontraded goods sector, q Nt. (In simulations 0. 9.)
LABOR ADJUSTMENT FRICTIONS Dt 1 Dt Nt 1 Nt There is a limit to how fast sector specific labor can adjust. Labor in the traded goods sector receives a different wage, w Dt, than labor in the nontraded goods sector, w Nt. (In simulations 1. 03.)
SUDDEN STOP! b t b t 1 b, t T,...,T N Domestic interest rate is endogenously determined, although interest payments on foreign debt b t are made at international interest rate.
REAL GDP Y t p Dt0 y Dt p Tt0 z TDt p Nt0 z NDt p Nt0 y Nt p Tt0 z TNt p Nt0 z NNt Dt m t REAL INVESTMENT I t p Tt0 z TIt p Nt0 z NIt REAL CAPITAL STOCK K t 1 1 K t I t TOTAL FACTOR PRODUCTIVITY TFP t Y t K t Dt Nt 1
Trade Balance 4 2 percent GDP 0-2 -4-6 data -8-10 model -12 1988 1990 1992 1994 1996 1998 2000
Real GDP per Working Age (15-64) person and TFP in Mexico Model 115 110 1988=100 105 100 GDP 95 TFP 90 1988 1990 1992 1994 1996 1998 2000
Real Exchange Rate 130 120 110 1988=100 100 90 80 data 70 model 60 1988 1990 1992 1994 1996 1998 2000