Influencing household inflation expectations
Alberto Cavallo, Guillermo Crucas, Ricardo Perez-Truglia 10 November 2014
Although central banks have a natural desire to influence household inflation expectations, there is no consensus on how these expectations are formed or the best ways to influence them. This column presents evidence from a series of survey experiments conducted in a low-inflation context (the US) and a high-inflation context (Argentina). The authors find that dispersion in household expectations can be explained by the cost of acquiring and interpreting inflation statistics, and by the use of inaccurate memories about price changes of specific products. They also provide recommendations for central bank communication strategies.
Expectations about macroeconomic variables play an important role in economic theory and policymaking. Household inflation expectations, in particular, are key to understand consumption and investment decisions, and ultimately, the impact of monetary policies. Although central banks have a natural desire to influence expectations, there is no consensus on how household expectations are formed or what the best way to affect them is (see Bernanke 2007, Bachmann et al. 2012, Coibion and Gorodnichenko 2013, and Armantier et al. 2014).
expectations, beliefs, inflation, inflation expectations, monetary policy, US, Argentina, central bank communication, rational inattention, costly information, learning
It takes more than two to tango: Cry, but not for Argentina, nor for the holdouts
Jeffrey Frankel 22 July 2014
The US court ruling forcing Argentina to pay its hold-out creditors has big implications. This column argues that some of them are particularly worrying. The court ruling undermines the possibility of negotiated re-structuring of unsustainable debt burdens in future crises. In the future, it will not be not enough for the debtor and 92% of creditors to reach an agreement, if holdouts and a New York judge can block it. This will make both debtors and creditors worse-off.
US federal courts have ruled that Argentina is prohibited from making payments to fulfil 2005 and 2010 agreements with its creditors to restructure its debt, so long as it is not also paying the few creditors that have all along been holdouts from those agreements. The judgment is likely to stick because the judge (Thomas Griesa, in New York) told American banks on 27 June that it would be illegal for them to transfer Argentina’s payments to the 92% of creditors who agreed to be restructured, and because the US Supreme Court in June declined to review the lower court rulings.
Development Global governance
US, sovereign debt, Argentina
External integration, structural transformation, and economic development: Evidence from Argentina 1870-1914
Pablo Fajgelbaum, Stephen Redding 12 July 2014
External integration is often viewed as an important driver of economic development, but most existing studies use aggregate data. This column present evidence from a natural experiment provided by Argentina’s integration into the world markets in the late 19th century. The findings suggest that proximity to trade centres is associated with employment density, high lands rates relative to wages, and structural transformation away from agriculture.
External economic integration is often argued to be an important driver of economic development, as it raises income through specialisation in comparative-advantage sectors, provides low-cost access to imported goods, and shapes the pattern of structural transformation from agricultural into non-agricultural activities. These relationships are typically examined at the aggregate level, implicitly treating each country as a point in space.
Development Economic history International trade
integration, comparative advantage, trade costs, Argentina, specialisation
Sustaining trade reform: Institutional lessons from Peru and Argentina
Elías A. Baracat, J. Michael Finger, Julio J. Nogués, Raúl León Thorne 28 October 2013
Trade reforms must be durable if countries are to reap the benefits of international specialisation and trade. Whereas Peru has sustained the reforms it carried out in the 1990s, Argentina has introduced multiple trade restrictions in recent years. This column argues that Peru’s success is due to two factors. First, Peruvian trade reform was part of a broader reform effort. Second, by highlighting the success of Asian countries and negotiating bilateral agreements, Peru’s political leaders fostered a positive vision of Peru’s role in the world economy.
Beyond removing restrictions, trade reform in Latin American in the 1980s and 1990s was also an attempt to reform the culture of policy management, and in some countries to introduce an optimistic, ‘Asian’ perspective into trade politics. In Peru, reforms have been sustained over several changes of president. In contrast, Argentina has introduced multiple restrictions and has reverted to the ‘off-the-books’ forms of policymaking that the adoption of GATT/WTO standards by previous the leadership tried to eliminate.
Institutions and economics International trade
WTO, trade liberalisation, Latin America, reform, Argentina, Peru
Greece’s predicament: Lessons from Argentina
Mickey Levy, Peter Kretzmer 16 May 2012
Greece’s economic and financial crisis is quickly deteriorating and there is no strategy – or even a coalition government – to figure out what to do next. This column looks at the lessons from Argentina’s default in 2001 and argues that Greece’s road to necessary economic reforms, fiscal sustainability and recovery may be even more daunting.
Argentina’s deepening recession, run on banks and associated social unrest in 2000-1 stemming from its own policy mistakes forced it to default and abandon its US dollar currency peg. The Argentine peso depreciated dramatically. Inflation soared temporarily, battering standards of living. But the default and currency depreciation set the stage for a turnaround which, aided by a fortuitous bounce in commodity prices, spurred a strong export and investment-led economic rebound.
Europe's nations and regions Monetary policy
default, Greece, Argentina, Eurozone crisis
Argentina's latest looming crisis
Eduardo Levy Yeyati 07 November 2011
Argentina's economic woes are always a topical subject, and a particularly relevant example for the Eurozone current crisis. This column weighs up Argentina's post-election outlook from a balanced perspective.
Argentina tends to elicit extreme views from economic analysts and commentators, ranging from reborn enthusiasts that marvel at the country`s unexpected performance to the point of promoting an “Argentine solution” to European problems, to sceptics that continue to expect a sudden stop to the ongoing bonanza. However, as Paul Krugman (an enthusiast) recently pointed out (Krugman 2011), a “consistently negative tone of reporting on Argentina” seems to be the rule. “Betting on another Argentine default may be going too far.
Global crisis International finance
How Argentina left its Eurozone
Eduardo Levy Yeyati 02 October 2011
One of the many proposals for escaping the Eurozone crisis is to follow in the footsteps of Argentina since its currency fiasco a decade ago. This column points out the realities of such a path: regressive wealth transfers and debt dilution. Against this dismal backdrop, a fiscal union might well be a better option.
The European predicament is:
- Financial (large debt stocks); and
- Real (large fiscal and current-account flow gaps).
A solution to just one of these is likely to be inadequate. A solution, for example, that focuses solely on debt restructuring would be incomplete if not complemented with a plan to recover price competitiveness and growth to fix the real problem.
EU policies Europe's nations and regions Monetary policy
Argentina, devaluation, Eurozone crisis, fiscal union
Argentina and Greece: More similarities than differences in the initial conditions
Miguel Kiguel 16 August 2011
A decade ago Argentina was in the midst of a severe economic crisis. This column argues that the episode offers lessons for the Eurozone today. Unless Greece takes major steps to improve its competitiveness and growth prospects, the country has little hope to get out of this crisis.
The parallels between the sagas of Argentina and the Eurozone are important and instructive. Cavallo (2011) has broached the issues; here I offer an alternate view of the lessons for Europe. This is based on my somewhat different view of the key flaws that led to the demise of Argentina’s experiment with a currency board.
While the analogy with Argentina in its turn-of-the-century crisis is closest with respect to Greece, aspects of the fatal flaws that brought down Argentina’s currency regime are shared by all of the Eurozone members.
Europe's nations and regions Global crisis
Greece, Argentina, Eurozone crisis
Are capital controls effective?
Eduardo Levy Yeyati 20 January 2011
The global crisis has reignited debate on the desirability of capital controls. This column examines evidence from Argentina and Chile and argues that capital controls can be effective, but that their effectiveness and efficiency varies. It adds that controls need to be considered as part of a macro-prudential toolkit to prevent asset inflation and overvaluation that is costly to revert in the down cycle.
“Not only are they ineffective but, in addition, they raise domestic interest rates.” This type of internally inconsistent commentary is not unusual when discussing capital controls – a subject marked with strong beliefs and weak data. Now that the G20 has sanctioned capital controls in Seoul under the umbrella of macro-prudential policies, it is a good time to revisit the subject of controls in a dispassionate way (G20 2010).1
US, protectionism, capital controls, Chile, Argentina
Argentina’s border emergency-kit in times of global crisis: In case of fire, break the glass
Demián Dalle, Federico Lavopa 11 January 2011
Since the breakout of the global crisis and the combined pledge to refrain from protectionism, the Global Trade Alert – among others – has documented numerous examples of countries breaking their promises. This column revises a paper from the 7th Global Trade Alert, providing analysis of Argentina’s unique policy responses and their surprising consequences.
After the outbreak of the global financial and economic crisis in mid-2008, unilateral and discriminatory trade measures multiplied in number. Developed countries put in place gigantic stimulus packages, some high- and middle-income countries set up catchall tariff and non-tariff measures, while those that had been applying import-duty rates below bound levels raised them up to bound ceilings.
protectionism, Global Trade Alert, Argentina