Title: Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons
Abstract: Abstract Argentina’s vulnerability to Sudden Stops in capital flows provides an alternative explanation for the fall of Argentina’s Convertibility Program. Sudden Stops are typically accompanied by a substantial depreciation of the real exchange rate that wreaks havoc in countries that are heavily dollarized in their liabilities, making otherwise sustainable fiscal and corporate sector positions unsustainable. In particular, we stress that the required change in relative prices is larger the more closed the economy is in terms of its supply of tradable goods. We also provide an explanation for the political maelstrom that ensued after the Sudden Stop triggered by the Russian crisis of 1998.