Introduction to Stop-Go Macroeconomics

Until the mid- 1970s Argentina followed an ISI strategy, which permitted the country to have an average of 4.4 per cent of GDP growth during the 1964– 74 period. Under this model the state became an important economic actor, with a leading role in the financial front through the fixing of interest rates and by rationing resources to (selected) investors or projects. Capital inflows and outflows were strictly limited, including important restrictions on remittances and limitations in FX transactions. Despite growth record growth the substitutive model began to periodically exhibit cycles of boom and burst responding to either the absence or the presence of an external gap. Inflation was certainly a key factor in explaining this pattern because it eroded industrial competitiveness by virtue of real exchange rate appreciation. Devaluating the national currency ideally permitted the government to boost (traditional) exports but simultaneously diminish (superfluous) imports. Manufacturing imports, however, were strongly affected by ER devaluation. So it happened with industrial activity, and additionally ER ups and downs prevented local firms from engaging in long- term planning. But devaluation also affected workers’ real wages. Eventually, inflationary pressures were erupting sooner rather than later, preventing a competitive ER for long- term equilibrium from being reinstalled. In other words, the national economy was cyclically confronting up and down movements, stop and go variations.

Notwithstanding, in 1975 the country suffered an important macroeconomic crisis – and, certainly, vast political turmoil, which ended in the coup d’état of 24 March 1976. In order to curb the crisis, the dictatorship took the initiative of implementing an ambitious liberalization package, shock therapy to remove or reduce regulations over the economy, including the reduction of trade barriers, the gradual removal of capital controls and the freeing of interest rates. The stabilization programme introduced a new exchange rate regime: a pre- announced rate of crawl (the tablita), captivated financial investors the most as it promised important and (apparently) safe returns. Additionally, the economy began to experience a series of current account deficits as well as a permanent increase in the country's foreign debt. Obviously, this lead to real exchange rate appreciation. The programme's credibility came under stress, however, after the Central Bank of Argentina (CBA) was forced to rescue several banks from systemic failure in March 1980.