The impact of the Argentine crisis on selected emerging market currencies

Abstract

Recent years have witnessed an increase in currency crises that affected a large number of emerging and developed countries, either directly or indirectly. A number of recent financial crises, including the Argentine currency crisis, have been accompanied by episodes of financial market contagion and speculative attacks. The emerging market financial and currency crises of the second half of 1990s have changed many economists' viewpoints with regard to exchange rate policies. A country's exchange rate system provides an important foundation for the implementation of other economic policy measures. Many economists and authorities believe that most emerging markets should either adopt a free-floating or super-fixed exchange rate regime in order to prevent the recurrence of financial or currency crises. Pure floating and fixed exchange rate regimes are only two of the possible exchange rate regimes that a country can choose to adopt. Neither pure floating nor fixed exchange rate regimes solve all the problems arising from modern globalised financial markets. Recent episodes of currency and financial crises have led to the costs and benefits of alternative exchange rate regimes being reconsidered. In choosing the right exchange rate regime for each country, one should take into consideration the size and degree of openness of the economy, the level of inflation, the degree of price and wage flexibility, financial development, credibility of policy makers and capital mobility. Argentina outperformed most other economies in the region until the massive collapse of the Argentine economy and the abandonment of the currency board early in 2002. Currency crises in emerging markets are often different in nature from those in mature and developed markets. Both currency crises in emerging markets and those in developed markets have triggered a variety of theories regarding the causes of speculative attacks. In this dissertation, an empirical analysis was performed with the aim of identifying speculative attacks and contagion on selected emerging and developed markets, occurring specifically during the period of the Argentine currency crisis. Countries that operated with free-floating exchange rate regimes during the Argentine currency crisis were more affected than those countries operating with fixed exchange rate regimes. It also became apparent that speculative attacks and contagion tended to be regional and occurred in emerging markets in the southern hemisphere.