BPEA Conference Drafts, September 5–6, 2019

Macri’s Macro: The Meandering Road to Stability and Growth

Federico Sturzenegger, Universidad de San Andrés

Conflict of Interest Disclosure: The author is Professor of Economics at Universidad de San Andrés and an advisor for Latus View, an investment firm. Beyond these affiliations, the author did not receive financial support from any firm or person for this paper or from any firm or person with a financial or political interest in this paper. He is currently not an officer, director, or board member of any organization with an interest in this paper. No outside party had the right to review this paper before circulation. The views expressed in this paper are those of the author, and do not necessarily reflect those of Universidad de San Andrés or Latus View.

Macri’s Macro The meandering road to stability and growth 1

Federico Sturzenegger Universidad de San Andrés

First Draft: July 2019 Conference Draft: August 2019

Abstract ThispaperreviewsthevariousmacroeconomicstabilizationprogramsduringtheMacrigovernmentbetween2015and2019.We�indthatafteraninitialsuccesseachprogramwasdiscontinuedbecauseofadistinctformoffiscal dominance :aspensionsareindexedwithalag,andrepresentalargefractionofspending,quickdisin�lationsjeopardize�iscalconsolidation.Lackofprogressinthe�iscalfrontduringthe�irstthreeyearsofthegovernmentmadethesereversalsunavoidable.

“...Whenever I visit a country they always say -you don´t understand Professor Dornbusch, here it is different-. ...Well, it never is”

Prof. Dornbusch to his students, 1987.

December10,2015MauricioMacriwasswornasPresidentofArgentina.Macriwasanunexpectedcharacterforsuchposition:anoutsidercomingfromArgentina’sbusinesseliteswhohadleftthatcovetedworldtobecome,�irst,thePresidentofapopularsoccerteam,andlatertheMayoroftheCityofBuenosAires.Hisownpersonalstoryofchange,representedwhathelongedforhiscountry:achangethatwasexpectedtorevertArgentina´sdecadeslongdecline.

Macri’sPresidencyalsobroughtinterestworldwide.ThesoftspokenMacri,emphasizingmoderation,empathyanddemocraticvalues,haddethroneda14yearholdonpowerbythePeronistParty.His�ighthadbeenthatofakindwordagainstanaggressivestatemachineryfullofresources.IthadbeenDavidvsGoliath.AsArgentinaslidcloserandclosertowardsbecomingamoreauthoritarianleftwingpopulistcountry,theworldlookedinawe.Argentina,amemberoftheG20,couldveerthewholepoliticalspectrumintheregion.Thus,Macri’striumph,whichreversedcourse,wasreceivedwithasenseofrelief.

Thesamesenseofrelief,andquietoptimismwassharedbyArgentina'spopulation,aswellasbyMacri’steam.Theprogramtheyhadsetupenvisionedabaseline

1PaperpreparedfortheFall2019BrookingsPapersonEconomicActivityConference.IthankAlbertoAdes,DanielArtana,SantiagoBarraza,NicolasCatena,DomingoCavallo,EduardoCavallo,FlorenciaGabrielli,CorsoGalardi,MauricioMacri,AndyNeumeyer,aswellasJaniceEberly,RafaelDiTellaandAndresVelascoforusefulcomments.IalsothankFedericoForteandTomasVilaforableresearchassistance.IalsothankLucianoCohanandAlbertoCavalloformakingavailablehighfrequencypricedata.Allremainingerrorsaremine.

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growthrateof3%peryear,thoughintimatelytheybelievedthiswasaconservativenumber.In�lationwouldgraduallycomedown,andtheyexpectedthatbytheendofMacri’s�irstpresidencyitwouldbearound5%.Asaresultofthiscombinationrealwageswouldhavegrownandpopulismwouldhavebeenprovenwrong.YetbytheendofMacri’s�irstpresidency,theresultshadturnedverydifferently.Outputwouldactuallydecrease3.4%(inpercapitatermscloseto8%)andin�lationwouldhaveaddedmorethan250%tothepricelevelandwasstillamongthehighestintheworld.Bytheendoftheterm,nobodycouldavoidasenseoffrustration.Shouldn'tthingshaveturnedmuchbetter?Didthingsworkoutsobadlybecauseitwasthenecessarypainofundertakinginevitableadjustments?Whathappenedwastheresultofexternalfactorsorofselfin�lictedmistakes?Wasitaninevitableconsequenceofwhatthegovernmenthadinherited?Orwasthisthecon�irmationthatArgentinaisa“lostcause”,andwillnever�indamendtoitsproblems?Thispaperattemptstoshedsomelightonthesequestions.Thepaperproceedsasfollows.InSectionIwestartwithananalysisoftheinitialconditions.Ourconclusionsisthatthestartingpointwasworsethanexpectedandperceivedatthetime.SectionIIdiscussesthemaincomponentsoftheinitialplan:gradual�iscaladjustment,in�lationtargetinganda�loatingexchangerate,andthereasonsitwaschosen.SectionIII,thecoreofthepaper,discussesthe�irsttwoyearsoftheprogram,whenin�lationtargetingwasimplemented.Wediscusstowhatextentexpectationsbecameadriverofthein�lationprocess.Wealsoreviewtheresults:aconsistentdisin�lation,which,thoughproceedingatapacethatwascomparablewithotherexperiences,wasslowerthanexpectedandslowerthanthepreestablishedtargets,while�iscalpolicyprocrastinatedeventuallyleadingtoacollisionwiththestabilizationprogram.Thiscollision,however,wasnottheresultofanattempttosecuremoreresourcesfromtheCentralBankbutadisagreementwiththespeedofdisin�lation,asafastdisin�lationjeopardized�iscalconvergencebecausehalfofgovernmentexpenditureisindexedbackwards.SectionIVdiscussestheunravellingoftheprogram,thatstartedwiththechangeofthein�lationtargetsattheendof2017,leadingtoaseriesofsuccessivecrises,lastinguntiltheelectionsalmosttwoyearslater.SectionVtriestodrawsomelessons. I. Initial Conditions Perhapsagoodstartingpointistoreviewtheconditionsinheritedbytheincominggovernmentattheendof2015.Despitethefactthatthedatasuggesteddebtlevelshadfallen,amoredetailedlookatthedatarevealsamoresomberpicture.Takingabroaderperspectiveofassetsandliabilitiesgivesamorepessimisticviewofsovereignobligations.Inparticular,theCentralBank'sbalancesheetwasdeterioratingquicklyandcapitalcontrolscontributedtoarisinggapbetweenof�icialandblackmarketexchangerates. Theheritagealsoincludedfouryearsofstagnation,alargeandgrowingbudgetde�icit,persistenthighin�lation,adualexchangeratesystem,utilitypricesthathadbeenfrozeninspiteofhighin�lation,andlackofreliablestatistics.Onthepositiveside,thecurrentaccountde�icitwasnottoolarge,thoughithasbeengrowing.Table1showsthestartingpointforthesevariablesamongothers.

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Theissueofdebtlevelsrequiresadiscussion,giventhatitwasthecenterpieceofthedebateonthe“legacy”ofthepreviousgovernment.ThepreviousgovernmentarguedithadmanagedtoproduceastrongreductioninthelevelofdebttoGDPandparticularlyinthelevelofdebttoGDPowedtomarketparticipants.Thiswassupportedbyof�icialdataandshowninthecolumnlabeled“of�icialdebt”inTable1andFigure1.

Table1.InitialConditions 2

Yet,webelievesomemethodologicalcaveatsshouldbemade,assomeofthechangesindebtlevelscamehandinhandwithchangesintheassetsorliabilitiesofthegovernment,generatingadifferentdynamicongovernment´snetworth.Let'sprovideanillustration.In2014thegovernmentissuedaboutUSD6.2bningovernmentbondstopurchaseanequitystakeof51%inoilcompanyYPF .But3

thisincreaseindebtcamewithasimultaneousincreaseinassets,andassuchdoesnotrepresentachangeingovernmentsnetworth.Onthecontrary,whenthegovernmentnationalizedthepensionsystem,itabsorbedallthedebtthatpreviouspension�irmshadaccumulatedoverthepreviousdecade,generatingasharpreductioninthedebtowedtothirdparties.Butatthesametimethegovernmentassumedtheliabilitieswithpensionersthatthisdebtwassupposedto�inance.Asaresulttherewasnochangeinnetindebtedness(unlessinthesensethatyoutransformacontractualdebtintoagovernmentspendingobligation).AthirdrelevantadjustmenttobeconsideredishowtotakeintoaccounttheroleofCentralBanknetreserves.IfthegovernmentcancelsdebtusingCentralBankreserves,itreducesbothdebtandanassets,withoutchangeinnetworth.Infact,othercountriesreportdebtonlynetofCentralBankreserves.

2Sourcesandnotes:In�lation:DatafromProvincialStatisticalInstitutesandCongressCPI(for2011andthe�irsthalfof2012,anaveragebetweentheSanLuisProvinceCPIandCongressCPIisused;fromthesecondhalfof2012toend-2015,anaveragebetweenSanLuisProvinceCPIandCABACPI);CPIend-of-periodvariation.GDP:INDEC;constantprices.FiscalResult:MinistryofFinance;itdoesnotincludeSocialSecurityFund's("FGS")andCentralBank'stransferstotheTreasury.CurrentAccount:INDEC.Of�icialDebt:MinistryofFinance:publicdebtwithprivatecreditorsandInternationalAgencies.Adjusteddebt:Author'selaboration;itiscomputedastheOf�icialDebtplusFGS'ssovereignbonds,GDPwarrants,debtwithholdouts,andCentralBank'ssecurities,minusCentralBank'sNetInternationalReservesandthevalueofthesharesheldbytheNationalGovernmentoftheoilcompanyYPF(nationalizedin2014).3Thepurchaseof51%ofYPFoccuredwhenthepriceofWTIwas101dollarsperbarrel.Fiveyearslaterthemarketvalueofthat51%wasjustUSD3.7bn.

3

Adjustingforthesechangesinassetsandliabilitiesisadif�iculttask.Howshouldtheseliabilitiesbemeasured?Forexample,whatistheNetPresentValue(NPV)ofthefuturepensionsassumedbythegovernmentwhenitnationalizedthepensionsystem?Cantheybedefaultedmoreeasilyorlesseasilythancontractualdebtanddoesthisaffectthevalueofthisdebt? 4

Inordertoaddresstheseissueswemake�ivecorrectionstotheof�icialstory.Thesearenottheonlypossibleones,buttheseshouldberelativelyuncontroversial.First,wenetoutCentralBanknetinternationalreserves.Secondly,weconsiderthattheliabilitiesassumedbythegovernmentatthetimeofthenationalizationofthepensionsystemwereequivalenttothedebtthatwasnationalized(anditsrollover).Inthirdplace,weaddedthedebtfromthedollarfuturecontractsissuedin2015(weusedtheactualcostpaidin2016).Fourth,wenetoutthevalueofYPF´sassets,and,�inally,wealsoincludedanestimateofthedebttoholdouts(wealsousethenumbersagreedin2016tocanceltheseobligations).TheresultsarealsoshowninFigure1.

Figure1

Thesecorrectionsshowthatuntil2012therewasasubstantialreductionindebt,theresultofarestructuringin2005,economicgrowth,�iscalsurplusesandtheappreciationoftherealexchangerate..Yetstartingin2012debthadstartedtocreepupagain.Infact,between2012and2015debttoGDPratiohadincreasedfrom23%to40%.Inconclusion,whilethelevelsofdebtremainedlow,theyhadincreasedsigni�icantlyinthefouryearspriortothechangeingovernment.EvenmorestrikingistheevolutionofthebalancesheetoftheCentralBank.DuringthepreviousyearsthegovernmenthadsystematicallypaidbackdebtusingCentral

4Foradetaileddiscussionaboutthistopic,seeLevy-YeyatiandSturzenegger(2007).

4

Bankreserves.Inexchange,thegovernmentstashedtheCentralBankwithdollar-denominatedLetras Intransferibles ,i.e.non-convertiblenotes.Thesenotespaidabelowmarketrate,andhadaten-yearmaturity.The�irstwasduein2016,althoughthebudgetlawapprovedin2015hadextendedthismaturityanadditional10years.Inshort,theNPVofthisbillwasminimalatmost,andhadzeroliquidity.Asaresult,thequalityofthebalancesheetoftheCentralBankhaddeterioratedveryrapidly.NettingouttheLetras Intransferibles andtheDomesticCreditaccount(Adelantos Transitorios ),thenetworthoftheCentralBankhadtakenanosedivebetween2006and2015,asshowninFigure2.A�inalrelevantpointcompletesthepicture.InOctober31,2011,inthefaceofgrowingcapital�light,theCentralBankhadimplementedanexchangeratecontrolmechanism(cepo )thathadincreasedtheblackmarketpremiumsigni�icantlyovertime.

Figure2

II. The plan and the cleaning up phase II.1. The plan Duringtheyearpriortotakingof�ice,agroupofeconomists,businessmenandgovernmentof�icialshadstartedworkinginaprogramincasetheelectionswerewon.Thisgrouphadbeengivenonesoleconstrainttheywouldhavetorespect:thereductionofthe�iscalde�icitwouldhappenonlyinagradualmanner.Beyondthatpointthecandidatelefttheteamfreetodesigntheprogramasitseemed�it.Thede�initionofa“gradual”adjustment(gradualism asitlaterbecameknown),hadbothaneconomicandpoliticalmotivation.Ontheeconomicfront,theconsensuswasthatasdebtwaslow(eventhoughwesawthisstatementshouldbe

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somewhatquali�ied),therewouldbe�inancingandtheitisalwaysbettertosmootheconomicadjustments .5

Butthemainobjectivewaspolitical.TheMacriadministrationcarriedthestigmaofbeingarightwingorcenterrightparty,andassuchitwasanticipatedthatitwouldkickoffitsgovernmentwithalarge�iscalandmonetaryadjustment.However,thepoliticalteamthoughtitwasessentialtoundothisstigma.TheargumentwasthatiftheMacriadministrationwasseenasadifferentpoliticalobject,thiswouldprovidepoliticalstrengthandpolicy�lexibilityinturbulenttimes.Inotherwords,whilegradualismentailedtheriskofincreasingthelevelofdebtduringtheinitialyears,withitsriskofacreditevent,atthesametime,itwasargued,nottakingthispathentailedtheriskofweakerpoliticalsupportatthetimewhenasevereadjustmentwouldbeneeded.Onthe�iscalfront,theprogramenvisionedaninitialcorrectionofthebudgetofbetween1.5/2%ofGDP,mostlyfromareductionofsubsidies,withaslowlydecliningde�icitthereafter.However,theprogramenvisionedagrowthrateofabout3%peryear.Withataxburdenofthenationalgovernmentofaround20%(MinisteriodeHaciendadelaNacionArgentina,2018),thisentaileda0.6%ofGDPincreasein�iscalresourceseachyear.So,totheextentthatrealexpenditureremainedconstant,thegovernmentcouldexpecttokeepits�iscalbalancerelativelystableastheresourcesfromgrowthwouldallowtoabsorbthebiggest�iscalchallengefacingthegovernment:thefactthatasin�lationdeceleratedpensionexpenditureswouldgrowasaresultofbackwardindexation.Atanyrate,theteamexpectedgrowthtobefaster,soasenseof(maybeunwarranted)easinessregarding�iscalresultswastransmitted.Onthemonetaryfronttheteamselectedanin�lationtargetingregime.Thespeedofdisin�lationhoweverwasconstrainedbythefactthatitwasagreedthatpartofthe�iscalde�icitwouldbemonetizedinordertodiminishtheneedofdebt�inancingduringthetransitiontoahealthier�iscalresult(inaddition,itwasbelievedthatthemoneyprintingagreedto�inancethede�icitshouldnotbesterilized,giventheweaknessofthebalancesheetoftheCentralBank).Thusthein�lationratetheprogramwouldhavetotoleratewouldbetheonethatwasconsistentwiththemoneyprintingtothegovernmentplusminusanychangesinmoneydemand.Thislednaturallytotheideaofhavingamultiyearin�lationtargetingregime.Inall,theprogramassumedthatoverthefouryearsin�lationwouldaddupto73%,thoughitwasexpectedthatin�lationwouldbebelow5%towardstheendofthemandate.InadditionitwasagreedthatArgentinawouldpursuea�loatingexchangerateregime.Theconsensusonthis,toasigni�icantextent,wasalegacyofArgentina'straumawiththe�inalperiodofConvertibility,a�ixedexchangerateregimethathadlastedadecadebetween1991and2001.Whileverysuccessfulinitsinitialyears,it´sinabilitytogenerateanadjustmentofrelativepricesaftertheRussiandefaultof

5AnearlysuchanapproachwasThatcher´sprogramofmacroeconomicstabilization.Sargent(1981)says“AhallmarkofMrs.Thatcher´publiclyannouncedstrategyisgradualism…hergovernmentdidnotproposetoexecuteanyabruptordiscontinuouschangeinaggregategovernmentvariables…InsteadtheConservativesproposedtocarryoutapreannouncedandgradualtighteningofmonetaryand�iscalpoliciesovera�iveyearperiod”.

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1998hadplungedtheeconomyintoafouryearlongcrisisthatendedwithabankingcrisisandadramaticfallinoutput.Inaddition,internationalexperiencehadenshrined�loatingratesastheagreeduponstandard,probablybecauseofitsabilitytosmoothoutexternalshocks,andwerethoughttodeliverhighergrowthandlowervolatilityinoutput .6

Inall,Table2showswhattheprogramenvisionedatthestartofthegovernment.Initalicsbeloweachprojectionthetableshowswhatactuallyhappened.Therestofthepaperattemptstoexplainwhythedivergencewassobig.

Table2.ThePredictionsoftheteaminJune2015

6Thereisalargeliteratureontherelativebene�itsof�ixedvs�loatingrates.SeeLevy-YeyatiandSturzenegger(2001,2003,2005,2007,2016),DiGiovanniandShambaugh(2008),Schmitt-GroheandUribe(2011),CalvoandReinhart(2002),amongmanyothers.

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II. 2. Capital controls liberalization Attheoutsetthegovernmentfacedsigni�icantchallenges:netinternationalreserveswerenegative,therewasnoliquidreservestotap,and,asthegovernmenthadcampaignedonthepromisetounifytheexchangeratemarket,exporterswereexpectingadepreciationofthecurrency,soexportshaddwindledtozero .Any7

attempttodelayasolutionwouldjustpostponetheresolutionoftheissue,whilethegovernmentwouldlosemomentum,andwouldrenegeononeofitsfundamentalcampaignpromises.Ddatewasdecidedforaweeklater.Itwasdecidedthatliftingcapitalcontrolswouldnotbe“bigbang”butwouldbedonegradually.Twomainreasonssupportedtheviewthatagradualopeningshouldbeundertaken.The�irstwasthattherewasnoclearideaofhowmoneydemandwouldreactafterfouryearsofforcedpesosavings,andthesecond,thattherewas,allegedly,alargestockofpendingimportpaymentsanddividendsdistributionstobemade.Nobodywassuretowhatextentthiswastrueornot,orhowrealtheserequestswere,buttheywerealatentrisk.Inaddition,justtomakethewholepicturecomplete,netreservesastheCentralBankwerenegative(seeFigure8-Panelb).Thedesiredimpactwouldbeobtainedbytwofeatures:allcomercial�lowswouldbefreedimmediately,andnoauthorizationwouldberequiredtobuyFXforupto2milliondollarsperday.Thisnumberwassuf�icientlyunexpected(someanalystswereexpectingthegovernmentcouldallowbuying30.000or60.000dollars),thattheteambelievedthatitwouldgeneratetheperceptionofasubstantialchange.Requeststopayfor“previous”importswouldbeauthorizedgraduallyovertimewithaqueuethatrespectedtheoriginaldayoftherequest.Thefreeingofthedemandforthispurposewasexpectedtobefullycompletedbymidyear.AtthesametimetheCentralBankdecidedtoreducetheforeignexchange(FX)exposureofbankstozeroonthe16thofDecember,thedaypriortotheuni�ication,allowingthemonlytorepurchasethisexposurebackonthe17thafterthejumpintheexchangerate.Thisimpliedagainofabout7bnpesos(1.2%ofthemoneybase),andservedtocompensate,atleastpartially,thelossestheCentralBankwasexpectingfromitsdollarfutureliabilities.Simultaneously,�loorsindepositratesandceilingsinlendingrateswereremoved.Ddatewasthe17th.ThenightbeforetheCentralBankagreedwiththePeople'sBankofChinaanimmediatedisbursementofaloanforUSD3.1bnbyconvertingtheequivalentamountofyuansforacurrencyswapintoUSD.Thiswasannouncedthedaybeforeoftheexchangerateliberalization.Inaddition,thedaybeforethegrainexportersofferedaguaranteetosellUSD330mmperdayonthemarketforthreeweeks,averysigni�icantamountconsideringthattheFXmarketoperatedaboutdoublethisamount.Thesetwoannouncementstriedtoprovidesome

7OnDecember10th2015,the�irstdayofthenewgovernmenttheBoardoftheCentralBankwasabouttoapproveabankandexchangerateholiday,amovethatwasquicklyavertedbytheincoming(notyetappointed)authorities.Banksacceptedtoimplementadefactoexchangeraterationingmechanismuntilthecontrolscouldbedismantled.Thisallowedtogothroughthetransitionwithoutdisruptionsinthefunctioningofthe�inancialsector.

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tranquilitytoamarketthatthefollowingdaywouldoperatefreelyforthe�irsttimeinfouryears.Netreserveswerenegative,andliquidresourcesavailabletotheCentralBankthatdaywerejustamere400milliondollars.Themarketopenedat13.90ARS/USDinits�irstoperation,andthenappreciatedslightly,apricebetweenthepreviousof�icialpriceof9andtheblackmarketpriceof16.Bynoonthemarketwasoperatingaloneandclosedat13.30.TheCentralBankdidnotintervenethatday,andinthefollowingdaystheexchangerateremainedoscillatingfreelyaroundthisvalue.Inall,thiswasseenasanunexpected�irstsuccessofthegovernment.II. 3. Futures, Holdouts and initial steps in monetary policy TheCentralBankalsofacedthechallengethatthepreviousgovernmenthadsoldasizableamountoffuturecontracts,duethroughJune2016atoffmarketprices.TheCentralBank’sshortpositiononFXfutureswasapproximatelyUSD17,400millionswhichcomparingthe�ixingpriceandtheinformalexchangerate,deliveredanexpectedcostof62,750millionpesos(11.2%ofmonetarybase).Twothingsalleviatedtheburden.Ontheonehand,Rofex,whichwasthemarketthattradedthesecontracts,unilaterallydecidedtochangethetermsofthecontractssignedafterthe29thofSeptemberof2015(itwasassumedthatafterthisdateparticipantshadengagedonlyfor“speculativereasons)”thisreducedthecostinabout11,085millionpesos.ThecostofotheroperationsdoneOTCbythebanks,waspartiallycompensatedbypurchasingtheFXpositionofbanksdescribedabovewhichsavedanadditional6,900million.Allinall,thecostswerereducedinnearlyARS18,000millionandthetotaleffectivecostfortheBCRAofthesefuturesendedatARS53,719millionpesos(9.6%ofthemonetarybase).AtthesametimethegovernmentsetouttosolvethelongpendingissueofArgentina'sdefault.Thelongzagahadendedwitharulinginfavorofholdoutsonthebasisofapari passu clausethatprecludedpaymentstorestructureddebtifpaymentswerenotmadetoholdouts.Thishadmotivatedthepreviousgovernmenttodefaultontheentiredebt.TheTreasurystartedworkingonthisandreachedanagreementinApril.Giventhecomplexityofthisnegotiation,wedeferthedetailstoAppendix1.TheoverallpaymenttosettlewithholdoutswasUSD9.3bn.Togetherwiththeliftingofthecapitalcontrolsandtheresolutionofthefuturesissue,thisentailedasigni�icantnormalizationoftheeconomy.TheobjectiveoftheCentralBankwastosustainastronglycontractionarymonetarypolicytoinsureacontrolledremovalofcapitalcontrols.Moneydemandwasuncertainafter4yearsofcapitalcontrols,butmoneysupplyalsoturneddif�iculttopindown.Attheendoftheyear,reserverequirementswereaveragedfortheperiodDecember-February.HoweverinDecemberbankshadpiledanunusuallylargeamountofliquidityinanticipationofarunondepositsorabankholiday.Theseresourceshadnotbeenusedgiventhatthetransitionwassmootherthanexpected,sotheyfoundthemselvescoveringinDecembermostofthereserverequirementsthroughFebruary.TheimplicationwasthatmoneysupplyinJanuary

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andFebruarycouldgrowsigni�icantlyastheunusedexcessreservesinDecembercouldbeallowedtorundownreserverequirementsinthefollowingtwomonths.Somewhatunawareofthis,inJanuaryandFebruarytheCentralBankabsorbedsigni�icantamountsofmoneyatdecreasinginterestrates,misreadingthefallininterestratesasticontractedasanimprovementincredibility.So,whiletheCentralBankabsorbed25%ofthemoneybase,itallowedtheinterestratetofallsigni�icantly(from38%to30.25%).Theresultwasanimmediatereactionoftheexchangerate,whichmovedfrom13.55to15.91.Attemptstosmooththeexchangerunbyusingreserves(whichhadstartedtogrowsincetheopeningoftheexchangeratecontrols)werenotsuccessful,andonlyquelledwheninterestrateswereincreasedto38%atthebeginningofMarch.Bythentherealamountofmoneyhadfallen16.4%substantiallymorethanwhatthegovernmenthadanticipated.Toavoidthejumpintheexchangeratemonetarypolicyshouldhavebeensigni�icantlytighterinthese�irstmonths(thismistakeintheinitialmonthsoftheyearwouldberepeatedagainin2017,2018and2019).Atanyrate,thedif�icultiesofthese�irstmonthsconvincedtheauthoritiesthatassessingmoneydemandandsupplymovementswouldbetoodif�icultandthatamechanismshouldquicklybeimplementedtosmoothouttheselargeswings.Duringthoseinitialmonths,thein�lationratesregisteredanincreaseof5.0%inDecember,3.8%inJanuary,3.4%inFebruary,3.2%inMarchand5.2%inApril ,8themonthinwhichthegovernmenthaddecidedtobundlemosttariffadjustments.Onlyafterthisdidin�lationdecelerate.III. The Inflation Targeting RegimeAsaresultofthedif�icultiesofthose�irstmonthsinMarch,theCentralBankannouncedaprocessofconvergencetoanin�lationtargetingregime(IT).Wedivideourdiscussionoftheregimearoundfourmainquestions.First,wastherearationaleforusingin�lationtargetinginArgentina?Second,werethepreconditionsmettolaunchanin�lationtargetingregime?Third,whatwastheadequatespeedofdisin�lationandhowwasitchosen?And,�inally,whatweretheresults?Thisdiscussionissplitbetweenadiscussionofthetransmissionmechanismandthepolicyresponse.Wethenbrie�lydiscusstheevolutionof�iscalaccountsandthebalancesheetoftheCentralBank,twofactorsthatbuiltuptensionsthatwererelevantintheeventualundoingoftheprogram. III. 1. A framework to assess inflation targetingThechoiceofadisin�lationprogramrequiresadiscussionofhowtocoordinateexpectationsalongthedisin�lationpath.Whileconsistentmonetaryand�iscalpoliciescannotbeavoided,thealternativesincludesaplethoraofpossibilities:usingtheexchangerateasanchors,usingincomespolicies,revertingtomorebasicmonetaryaggregates,orthemoreconventional(atleastatthetime)frameworkof

8ThesenumbersarederivedfromtheaveragebetweentheCPIsoftheCityofBuenosAiresandSanLuis.

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in�lationtargeting.Alargeliteraturediscussesthemeritsandbene�itsofeach.Exchangeratestypicallyhelptocoordinateexpectations,andhadbeenusedinmanysuccessfulstabilizationepisodes,notonlyinwellknownsuccessfulstabilizationsofthe1980sandearly1990s(ConvertibilityinArgentina,thePlanRealinBrazilortheIsraelStabilization ),butalsoinmorerecentexperiencessuch9

asthatofChileandIsrael .Inadditionalargeliteraturesuggeststhatexchange10

ratebasedstabilizationsleadtoinitialbooms(Calvo&Vegh,1993)thushelpingbuildpoliticalsupportforreforms.However,theteamdisregardedtheseargumentsonthebasisofneedofashockabsorberinasmallopeneconomy,andwerewillingtoforegotheinitialbene�itstobuildthisadjustmentmechanism .11

Theteamalsoarguedthatitwouldbeeasiertobuildcredibilitybyusingaframeworkthatwasmainstream,inlinewiththeideaofthenormalizationofArgentina.Thiswasbasicallyalsothereasonwhytheuseofincomespolicieswerediscarded,thoughotherargumentswerethatthegovernmentdidnotwanttosit“theold-politics”playersatthedecisiontableandthatutilitypriceadjustmentswouldtakealongtime.Additionally,incomepolicieswouldseemsimilartosomeofthepoliciesimplementedbythepreviousadministrationwithwhichthecurrentadministrationwantedtoprovideacleandistinction.Indexationalsohadbeenbannedfromlaborcontracts,sopastcontractswrittenatahigherin�lationratewouldalsonotbeaproblem.Thefactthatgovernmentspendingwasindexedandthereforesomesortofincomepoliciestodealwiththeimpactofdisin�lationontherealspendingwasdisregardedbelievingitcouldbeabsorbedbythebudget.Barringtheuseoftheexchangerateandincomespolicyasanchors,theteamfacedthealternativeofusingmonetaryaggregatesorin�lationtargetsasanchors(thislateroneimplementedbyusinganinterestratepolicythatrespondstothein�lationrate).Frankeletal.(2008),canhelpusunderstandsomeofthetradeoffsinvolvedbetweenthesetwoalternatives.Consideranoutputequationthatdependsbothondemandandsupplyshocks( and )aswellasamonetaryd s shock :m m ) ( − d

. d s β(m m ) y = + + − d

Andanin�lationequation,whichalsodependsonthesamethreeshocks,

.m m s ν d π = − d − ω + Hereallshockshavemeanzero,sotheissueatstakeisvolatility.Let'sassumetwopossibilities.Anin�lationtargetingregimewhere ischosentomake =0,andm π anotherofmonetaryaggregateswhere =0.UnderIn�lationTargetingwehavem (assumingallcovariancesequaltozero):

0σ2π =

,σ (1 βν) σ (1 βω) σ2y = 2

d − 2 + 2s − 2

9SeeDornbusch&Fisher(1988).10DeGregorio(2004)andFrenkel(1996).11Sturzenegger(2016)makesthiscaseexplicitly,andalsousedtheargumentofTornellandVelasco(2000):�loatingratesbyrevealingquicklytheeffectsofpoliciesinducesmore�iscaldiscipline.

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whileundermonetaryaggregates,thesevolatilitiesare:

σ σ ν σσ2π = 2

md + ω2 2s + 2 2

d .σ σσ2

y = 2d + σ2

s + β2 2md

In�lationtargetingdeliversamorestablein�lation,obviously,butoutputvolatilitydependsontherelativestrengthofsupplyshocks(whichanin�lationtargetingregimesampli�ies)anddemandandmoneydemandshocks(whichanin�lationtargetingregimesmoothesout).Weconfrontthisbasicframeworkwiththedatainthefollowingway.Inordertoidentifythevolatilityinrealmoneydemandweidentifyperiodsofconstantinterestratesinin�lationtargetingregimes.Giventhatmoneysupplyisendogenous,changesinthestockofmoneycanonlybeassociatedwithchangesinmoneydemandandthusprovidesavalididenti�icationmechanismformoneydemandshocks ..Inordertoavoidvolatilityarisingfromseasonality,wetakethe12

periodinwhichthisidenti�icationcanbemadeinArgentina,andcompareittosimilarperiodsforothercountrieswerethisconditionisalsomet.Forsupplyshocksweusethevolatilityinthepricesofregulatedgoods,assumingthatthisisavalidproxyfor,mostly,changesinthesupplyconditionsofthesegoods.TheresultsaresummarizedinTable3whichshowsthatArgentinaexhibitsanunusuallyhighvolatilitybothinmoneydemandaswellasinsupplyshocks.Inall,thisdoesnotprovideconclusiveevidenceonthebene�itsofeitherregime,thoughitstressesthatdealingwiththevolatilityofmoneydemandpresentsaparticularchallengeinArgentina .Regardingsupplyshocks,theyappearveryhigh13

in2016butwereabouthalfthesizein2017,whentheyappearmoreinlinewiththoseofothercountries.Thus,itcouldbeargued,thatleavingbehindtheinitiallargeshockinregulatedpricesimplementedinAprilof2016 thevolatilityof14

moneydemandprovidedarationaleforadoptingITinArgentina.Atanyrate,whiletheinitialprogramhadalreadyplannedanITframework,thevolatilityinthemoneymarketintheinitialmonthshadreinforcedthisview.Whilethebene�itsofsmoothingmonetaryshocksappearclear,adrawbackofanITregimeisthatthetargetisnotsomethingunderfullcontroloftheauthorities;placingtheminaconstanttensionbetweendefendingthetargetstoalign

12Whilethereareseveralestimatesofmoneydemand(seeforexampleBenati,Lucas,Nicoliniet.al,2016;Gay,2005;Aguirre,etal.,2006;AhumadaandGaregnani,2002),webelievethisapproachavoidstheneedtosidewithaspeci�icspeci�ication. 13MoneydemandisparticularlyvolatileinArgentinabecausetwiceayearsalariesreceivea50%extrapayment,leadingtolargeseasonalswings,whilepublicsectordepositsarearelativelylargefractionofthe�inancialsectorandexhibitsubstantialvolatility.Financialinnovation,incentivatedbytheCentralBankitselfledtoasizablefallinthedemandforcash,compoundingthevolatilityinbasemoneydemand.14Duringthe�irstfourmonthsof2016electricitypriceswereincreased250%,naturalgasprices195%,waterdistribution300%,andtransportation100%.

12

expectationsandnottakingthemtoseriouslytoavoidcredibilitylosses .Inan15

in�lationtargetingregimetransitoryshocksthatdeviatein�lationfromthetrajectory,haveamoredetrimentaleffectoncredibilitythaninamonetaryaggregatesregime,asitismoredif�iculttoassessifmonetaryauthoritiesaresuf�icientlycommittedto�ightingin�lation.Inaprocesswithmanyanticipatedbutuncertainchangesinregulatedprices,thiswouldlateronturnouttobeasigni�icantdrawback.Anotherweaknessoftheregimearisesfromthefactthatmoneysupplyisendogenoussoifexpectationsarenottamed,thein�lationprocessremainsvirtuallyunanchored,unlessthereisastrongpolicyreaction .16

Atanyrate,asmentionedtheexperienceofthe�irstfewmonthswithitsunwieldymonetaryshocks,tippedthebalanceinfavoroftheITregime.

Table3.Moneydemandandsupplypricesvolatility 17

15Analternativeviewisthatin�lationtargetinghastobeunderstoodasa“�lexiblein�lationtargeting”meaningthatanin�lationshockdoesnotneedtobereversedlateron.Inthiscase,supplyshocksneednotelicitthereactionassumedinthepreviousmodel,asadeviationarisingfromasupplyshockisjustexplainedandnotnecessarilyundone.tiltingthebalanceevenmoresoinfavorofIT.However,iftheseshockswerelargerthanexpectedandrequirepermanentexplicationsforthedeviationfromtargets,theyeventuallyunderminecredibility,afeaturethatwasunderestimated.16SeeSargent&Wallace(1975),Cochrane(2011),Neumeyer&Nicolini(2011).17ThetableintheleftcomparestheStandardErrorofM2/PacrossdifferentLatinAmericancountriesandUSforperiodsofstablemonetarypolicyratesince2000.Thecomparisonisestablishedforthesamemonthsinwhichthemonetarypolicyratewas�ixedinArgentina,thatis,fromDecember2016toMarch2017andfromMay2017toOctober2017.Thetableintherightcomparesthevolatilityintheratioofregulatedpricesandgeneralpriceindexforthesamecountriesfrom2016to2018.ItusestheCOICOPstandardizeddivisioninthecountriesinwhichitisavailable;forthecasesofBrazilandPeru,thecategoriesusedareFuelsandTransportsasde�inedbytheirnationalstatisticsinstitutes.

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III. 2. Preconditions for inflation targeting ThechallengesofimplementingITstartingathighin�lationswerenotunknown,andinfacthavebeenthesourceofmuchdebate.Mishkinet al (2001),discussatlengththemitigatingfactorsfortheriskofcredibilitylosses,whicharelikelytooccurduringthedisin�lationpath.Inparticulartheysuggestfourwaysofdealingwiththeseissues,a)agradualformalizationofin�lationtargetingovertime,b)apathofdisin�lationwithmultiyeartargets,c)theneedtoavoidthetemptationofallowingarangetoallowvolatility,d)andhavingareasonablepaceofdisin�lation.ThesepointswereaddressedbyinitiallyallowingforatransitiontoIT,thoughitwasannounceditwouldbeshort(lessthanayear),andbysettingmultiyeartargetswithapaceassociatedtotheagreedtransfertotheTreasury.Contrarytotherecommendation,arangewasestablished,and,infact,turneduselessasexpectationscoordinatedontheupperbound(thiswaschangedbrie�lyin2018) .18

Alargeliteraturealsodiscussestheconditionsrequiredforeffectivein�lationtargeting .Amongthese,thetypical�ivepillarsare:theabsenceofothernominal19

anchors,aninstitutionalcommitmenttopricestability,theabsenceof�iscaldominance,CentralBankautonomy,andpolicytransparencyandaccountability .20

TheteamconceivedtheITregimeasawaytofocustheattentionoftheCentralBankonin�lation,allowingittousealltherelevanttoolstobringin�lationdown.Inordertocoordinateexpectations,theybelieved,theonlywaywastotakeownershipofthe�ightagainstin�lationandtobetotallycommittedtothatobjective.ThereisadiscussionofhowmuchshouldtheexchangerateparticipateintheobjectivefunctionoftheCentralBank.Adiscussionthathaditsempiricalcounterpartinmanyearlyexperiencesallowingforanexchangeratebandtoaccompanytheconsolidationofdisin�lation(ChileandIsraelaretwowellknownexamples).ThereisalsoaliteratureontheroleofFXinthereactionfunction.SeeMoron&Winkelried(2005).Cespedesetal.(2012),DePaoli(2009),Garciaetal.(2011)andPourroy(2012).InthecaseofArgentinawhilemanyobserverssuggestedthispointwaskeytocoordinateexpectations,theCentralBankarguedtheopposite,thatinordertolowerpassthroughlevels,itwasimportantthattheCentralBankstatedthatitdidnotcareabouttheexchangerateatall.Wecomebacktothispointbelow.Byallowinga�loatingrate,committingtoin�lationasthemainpriorityoftheCentralBank,whileimplementingpolicytransparencyandaccountability(wellde�inedtargets,pre-scheduledcommuniquesandpressconferences),the

18Oneissuewasspeci�ictoArgentina.Whentheprogramwaslaunchedtherewasactuallynoof�icialin�lationstatistics,asthein�lationnumbershadbeensigni�icantlytamperedwithandthenewauthoritiesweretryingtore-launchacrediblein�lationstatistic.The�irstavailablenumbercameinMay.Priortothatthein�lationrateoftheCityofBuenosAiresandSanLuisprovincewereused.19SeeMassonetal.(1997),Mishkin(2000).20Forarecentreviewoftheseissues,seeAgenorandPereiradaSilva(2019).

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authoritiesthoughtmostofthepreconditionsweremet.FiscaldominancewascontainedbyanticipatingapathfortransfersfromtheCentralBanktotheGovernment.Andwhiletheseannouncementsmetlittlecredibilityinitially,credibilitybuildupprettyquicklyasthegovernmentstickedtotheannouncements.Oneimportant�law,thatwouldturncriticallateronwasthattheregimewaslackingCentralBankindependence,asthePresidentcaneasilyremovetheCentralBankgovernor,buttheteambelievedthatresultswouldstrengthentheirindependence,generatingthesupportforaninstitutionalimprovementlateron.OnerecurrentdiscussionhadtodowiththefactthatArgentinastarteditsdisin�lationprogramwitharelativelyhighin�lationrateandthatin�lationtargetingregimestypicallytakeoveratlowerrates. Analternativecriticismisthatmany21

programsusedthehelpofothernominalanchorssuchastheexchangerate.

Figure3.ThepathofDisin�lationinITexperiences 22

Figure3triestoshedlightonthesequestions.ItshowsallcountriesthatimplementedIToreventuallyconvergedtoITbutwhichhadin�lationratesabove20%atleastoncesince1990.Foreachcountryitshowsthedisin�lationfromthelasttimein�lationwasabove20%,andforthosecomingfromhigherrates,from

21Muchoftheargumentsthatin�lationtargetingtakesoffatlowerratesconsistmerelyinadenominationissue.Inthe90sand00s,manyCentralBanksfocusedondisin�lationbyimplementingmostofthefeaturesofin�lationtargetingregimes,butonlynamedtheirregimeassuchlaterintheprocess. 22DataretrievedfromIFS.Theclassi�icationof�loatingregimesandnominalanchorregimeswasestablishedwithacase-by-casenarrativeanalysis.ForBrazil,Flynn(1996)andDePaula(2003);Chile,Massad(2001)andRojas(2000);Colombia,Urrutia(2005)andCarrasquilla(1995);CzechRepublic,Smidkova&Hrncir(2000);Hungary,Zoican(2001);Iceland,Gu(1997)andOECDSurvey(2017);Indonesia,Ramayandi&Rosario(2010)andCentralBankBankofIndonesia(2005);Israel,Klein(1998)andBuifman&Leiderman(1998);Mexico,Martınezetal.(2001);Poland,Kokoszczynski(2001);Romania,Niculina&Catalina(2009)andDobrota(2007);SlovakRepublic,Beblavy(2002)andNagy(2016);Turkey,SerdengectiandDervis(2001)andtheof�icialwebsiteofCentralBankofTurkey.Usingadefactoclassi�icationofexchangerateregimessuchasthatinLevyYeyatiandSturzenegger(2016),Israel,Colombia,theCzechrepublicandPolandwouldbeclassi�iedas�loats.Butthisdoesnotchangetheconclusions.

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thetimetheyreacha45%yoyin�lationrate.Inshort,thesampleattemptstoillustratethe�inalphasesofthedisin�lationineachcase.Thegraphdistinguishesthosecasesthatimplementedthedisin�lationthroughapure�loatandthosethatusedsomesortofexchangerateanchorduringtheinitialphasesofthedisin�lation.Wedisregardincomespolicies,asonlyonecountryusedtheminthissample(Icelandin1989).Figure3showsthatcountriesthatoptedforamostly�loatingrate,startedatin�lationratessimilartothoseofArgentina,andthattheexchangerateanchorseemsnottobenecessaryforasuccessfulstabilization.Manycountrieswithlowerin�lationratesdidusetheexchangeratetool,andinmostcasesthestabilizationprocesseswereslower .23

Insummary,neitherthelevelofin�lationnorthechoiceofa�loatingregimeseemedtohavebeenfactorsthatdoomedthechosenstrategy.III. 3. The discussion on speed and other implementation details Thespeedofdisin�lationproposedinthein�lationtargets,was,somewhatsurprisingly,thesourceofmuchdebate.Thegeneralconsensuswasthatthetargetsweretooaggressiveandunrealistic.Somearguedthatitwouldhavebeenbetterto�inancealargershareofthede�icitthroughmoneyprintingandin�lation,toavoidadebtbuildup.OthersarguedthatthetargetsweretooaggressiveforArgentina,givenitshistoryofinertiaandchronicin�lation.Uribe(2016)providesanormativeanalysis.Inhisperfectforesightin�initelylivedagentmodeltheoptimalpolicyistoaimforthelongrunin�lationrate(aversionofthetaxsmoothingprincipleofBarro,1979),evenifthisimpliesahighersterilizationeffortandahighersteadystatein�lation .24

YettheweaknessinthebalancesheetoftheCentralBankmadethistaxsmoothingapproachtooriskyintheviewoftheCentralBank.Soonlypartofthe�iscalde�icitwas�inancedwithmoneyprinting(full�inancingwouldhaveledtoveryhighin�lationrates),butthennoneofthesetransfersweresterilized.Thus,theamountof�inancingtothede�icitwoulddeterminehowmuchthemoneybasewouldgrowineachyear,andthis,inturn,woulddetermine,roughly,whatthetargetshouldbe.Barringbigchangesinmoneydemand,in�lationshouldalignwiththisnumber(onlya10%fallinmoneydemandwasexpectedinthe�irstyear).Forexample,the�irstyeartheCentralBankwouldtransfertheequivalentof25%ofthemoneybase,thesecondyear17%,then10%andthen5%. Thelinkingofthetargetstothe25

23Insomecasesthe�loatallowedtoacceleratethestabilization,asinthecaseofIndonesiawheretheRupiahappreciatedfrom14.900toapproximately7.000perUSD.24ManuelliandVizcaino(2017)provideasimilarmodelwithincompletecredibility.25Apointofcontentionwasonthetargetsfor2016.Theteamanticipatedafallinthedemandofmoneythatwouldtakethein�lationrateinitiallytothe40%range,thusacommitmentof25%fortheyearseemedtooaggressiveandriskedunderminingfromthestartthecredibilityoftheCentralBank.TheCentralBanksuggestedthatthein�lationtargetsshouldbede�inedoncemoneydemandstabilizedinAprilorMay.However,theExecutiveannouncedthetargetsinJanuary.Eventually,the

16

growthinmoneyfromtransfers,did,however,reducetoaminimumthemarginoftheCentralBanktoimproveitsbalancesheetthroughouttheprocess.Thiswouldbecomeaheavyburdenlateron.

Twoadditionaldecisionsalsobecameproblemslateron.The�irstwastouseoverallin�lationandnotcorein�lationastheobjective.Aswewillseelatercorein�lationdeclinedsmoothlyoverthefollowingyearandahalf,whileoverallin�lationhadlarger�luctuations.Thailandhadmovedawayfromcoretooverallin�lationarguingthatthisisameasuremoreeasilyidenti�iedbythepopulation,yetlargedisin�lationswithlargechangesinrelativepricesmaybebetterservedbyusingcorein�lation(theCzechRepublicexamplebeingtheclearest;fordetailedreviewofthiscase ).So,whileoverallin�lationisamorepalpable,measureforthe26

target,itismorevolatilemakingitmoredif�iculttocontrol.Inaddition,settingtargetsfora�ixedcalendaralsobecameaproblem.Iftheinitialmonthsoftheyearwereabovetarget,thisrepresentedadragthroughouttheyeargeneratingalossofcredibilityiftheCentralBankwasnotwillingtoundershootitstargetinordertocompensateforpastdeviations.Maybeabettersystemwouldhavebeentolookat12monthforwardexpectations,moreinlinewiththecurrentviewthatCentralBanksshouldtargetin�lationexpectationsandnotin�lationperse,orhavearollingtarget(manycountriessetthetargetsonayearlybasis).OntheotherhandGibbs&Kulish(2017),provideamodelofdisin�lationinanin�lationtargetframeworkwithimperfectcredibilityoftheCentralbanker.Their�indingssuggestthatannouncingapreestablishedpathofdisin�lationreducesthesacri�iceratioevenatlowlevelsofcredibility.Ataminimum,havinganinstitutionalmechanismtosetandevenreviewthetargetswouldhaveavoidedissuingsuchanegativesignalifthetargetsatanypointwerechanged.Alternatively,thetargetscouldhavebeeninterpretedmoresoftly,thusreducingtheircoordinationpower,butdilutingthecredibilitycostsofnotachievingtheirvalue.Alltheseissuessuggestthatthechoiceoftargetsrequiresveryspecialattention.III. 4. Results of the inflation targeting regimeInMarch2016theCentralBankannouncedatransitiontoanin�lationtargetingregimethatwouldstartthefollowingyear,within�lationtargetsof12-17%for2017,8-12%for2018and4-6%for2019 .Afterthelaunchoftheprogram27

in�lationcamedownquickly,andin�lationexpectationsstartedatrelativelylowlevels,i.e.,theprogramstartedwithasubstantialamountofcredibility.Aftermanyyearswithin�lationoscillatingbetween25and40%,the�irstmeasureofin�lationexpectationsinJune2016,reportedexpectedin�lationfor2017of19.0%andfor

CentralBankneverendorsedthe2016target,andjustannouncedthatitwouldtrytoapproximateitasmuchaspossible.However,consideringthatthetargetsforthefollowingyearsmatchedthoseannounced,theCentralBanksufferedintermsofcredibilityasitcouldneverreverttheideathatithadcommittedtoa25%targetforthe�irstyear.26SeeAdrian,LaxtonandObstfeld(2018).27AcuriosityoftheArgentineanexperienceisthatthein�lationtargetingregimewaslaunchedwhenArgentinahadnoin�lationnumber,asof�icialstatisticshadbecomeunreliableandwereintheprocessofbeingreestablished.The�irstin�lationnumberwaspublishedinMay2016.ForpreviousmonthsCityofBuenosAiresandSanLuisprovincenumberswereused.

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24monthsaheadof15.7%.InOctober2016,whentheCentralBanksurveyaskedforthe�irsttimeamultiyearexpectationofin�lation,theexpectationfor2017was19.7%,for2018was14.8%andfor2019below10%.Figure4showsthat12-monthforwardin�lationexpectationdecreasedsystematically.In�lationwas5.2%inApril,4.2%inMay,3.1%inJune,2.0%inJulyand0.9%inAugustwhentherewasatemporaryreversalofsomeofthetariffhikesofApril.In�lationremainedsubduedinthesecondhalfoftheyear,whenittotalized8.9%averaging1,4%permonth.In�lationinDecemberandJanuarywere1.2%and1.6%(m-o-m).Thedisin�lationmetcontinuouscriticismfromTreasuryoninterestrates.ThisdiscussionwasparticularlystrongbetweenMarchandMaywhentheinterestrateremainedat38%,butdidnotabateevenaftertheCentralBankstartedreducinginterestrates.Inaddition,inJuly ,theTreasurymanagedtosecureaPresidential28

decreerequestingUSD4bnfromCentralBankreserveswhichtheCentralBankblocked.Inall,thesecon�lictshelpedtheCentralBanktogaincredibilityandreaf�irmitsindependenceandcommitmenttoloweringin�lation.Duringthisperiod,theCentralBankpushedforfurtheropeningofthecapitalaccount.Infact,byApril2016,thedemandforpastimportswasfullyfreed.InadditiontheUSD2mncapforFXpurchaseswasincreasedtoUSD5mninMay2016,andeliminatedaltogetherinAugust.InSeptember2016theCentralBankannouncedtheformallaunchofthein�lationtargetingregimestartingin2017.Infact,notmuchwouldchange,exceptthatthepolicyinstrumentwouldstopbeingthe35-dayLebacs(CentralBankpaper)andwouldbecomethecenterpointofthe7-dayreporate.ThischangeattemptedtoaligntheoperationalframeworkoftheCentralBankwiththatofstandardprocedureinCentralBankingandgenerateamoredirectlinkwithratesinthe�inancialsector.Thereductioninin�lationduringthisperiodhadanimpactinthebondmarket.InOctober2016ArgentinaplacedUSD8.3bninpesobondsat5,7and10yearsatanominalannualratesof18.2%,16%and15.5%,whichmeasuresthecon�idenceinthestabilizationprogram.Thisissuewouldhavebeenunimaginableafewmonthsearlier.Inspiteofthefearsofinertialin�lation,thereductioninin�lationwasratherquick,thoughyearonyearnumbersremainedbig,duetothebigspikeofearliermonths.Perhapstheonlysourspotinthisprocesswasthatcorein�lationdidremainsomewhathigher,at10.8%,inthesecondhalfof2016 (1,7%monthly).29

28Decree834/2016.29IPC-GBAINDEC,theonlycorein�lationavailableuntil2017.

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Figure4.TheeconomyduringtheITphase

19

III.4.a What was the disinflation mechanism? Inspiteofthefallinthein�lationrateadebateensuedonwhethertheinterestratewassuf�icienttoreducein�lation,andontheroleofutilitypriceadjustments,inertiaandtheFXinthein�lationprocess. DuetolackofdatalittleresearchinArgentinahasfocusedontheroleofexpectationsinthein�lationprocess.AsshowninFigure5,prices,expectations,theFXandregulatedpricesallmovetogether.Thus,iteasytoassumecausalityfromeitherofthesevariablestothein�lationprocess.Buthowdoeachvariableplayoutwhentakingintoaccounttheothers?WeaddressthisquestionbyrunningaVECMofweeklycoreprices,FXandregulatedpricesandin�lationexpectations,nottoprovideamodelofin�lationbuttocheckhowthesevariablesinteractandreacttoeachother.Appendix2describesthemethodology.Table4showsthecoef�icientsofthecointegratingregression.Inthe�irstcolumn,onlyFXandregulatedpricesaretakenintoaccount,whilethesecondandthirdcolumnsforeachsampleperiodincludetheexpectationsofin�lationatonemonthandtwelvemonthhorizon.TheresultsshowthatduringtheITperiod,onceexpectationsareconsidered,thestatisticalrelationbetweenpricesandFXandutilitypricesvirtuallydisappears.Thisresultweakenswhenthesampleisextendedto2019whenthein�lationprocesshadunanchoredandin�lationtargetingabandoned.Figure6,showsthevariancedecompositions.Itshowsthatin�lationhasaninertialcomponentbut,again,fortheITperiodexpectationsappeartohavebeenafundamentaldriverofpricedynamics,whiletheexchangeratebecomesrelevantonlywhentheregimeisabandoned.Otherresults(seeAppendix2)showthatduringtheITregimeajumpinregulatedpricesaffectedcorepricesintheshortrun(aresultfoundalsoinNavajas,2019andconsistentwithAlvarezetal(2019).thatshowthepriceadjustmentsarerather�ixedinsizeandonlychangeinfrequency).Theestimationisnotwithoutproblems,andthesamplesaresmall,asdiscussedinAppendix2,buttheresultisrelativelyrobusttodifferenteconometricspeci�ications.Theseresultsareincludedheretonotethatitisnecessarytoincludeexpectationsasarelevantdriverofthein�lationprocess,somethingthathasbeenlackingintheempiricalworkonin�lationinArgentina.Certainlyfurtherresearchonthistopicisrequired.Butwealsoincludetheseestimatestoaddressthefundamentalquestionofthetransmissionmechanismsforachievingdisin�lationintheITregime.Itappearsthatthecoordinationofexpectationsplayedafundamentalrole,allowingtogenerateconvergenceinthein�lationdynamicswithoutneedtoexertanexcessivelycontractionarymonetarypolicy.TheseresultswereprobablyaidedbythefactthatArgentinahasnoformalindexationofcontracts,whichreducesthedragofinertia.Infactwagenegotiationswerequiteforwardlooking.Forexample,considerthetransitionfrom2016to2017.In�lation�inalized2016at36.6%andtheCentralBankin�lationtargetfor2017wentupto17%.Wagenegotiations�inalizedinthe20/25%range,whichcorrespondstoacontractconsistentwiththe

20

in�lationtarget .Thus,tosomeextent,thein�lationtargetactedasasubstitutefor30

incomespolicy.

Figure5.Thecomovementofpricesandexpectations

Table4.VECMmodelforin�lationinArgentina.CointegratingVector.

30SeeBancoCentral(2016.b),whereitisshownthatinadisin�lationprocess,thewagenegotiationsthatkeeptherealwageconstant,equalstheaverageofnextyearin�lationandpastyearin�lation,thusatahighervaluethanthefuturein�lationrate.

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Figure6.Variancedecompositions

III. 4. b. The policy reaction Thequickfallinthein�lationratetriggeredagradualreductioninthepolicyrate.Bytheendof2016theratehadbeenreducedfrom38%to24.75%.InJanuary,whenthetransitionwasmadetoaformalin�lationtargetingregime,anadditionaltechnicalproblememerged.RepospaidalocalcitytaxwhichtheLebacsdidnot,andasthepolicyratewaskeptconstantrelativetothepreviousLebacrate,thisledbyarbitragetoanabruptfallintheLebacratethathadnotbeenanticipatednordesiredbytheauthorities.TheCentralBankdelayedasolution,allowingadefactoeasingofmonetarypolicybeyonditwouldhavebeendesired.InadditioninJanuary2017anewTreasuryMinistermadeasmallbutsubstantialregulatory.Thelastremainingvestigesofcapitalcontrolswerea4-monthstayoninvestmentsinpesos.Thefourmonthstayimposedasizableamountofcurrencyriskonanybetontheargentinianpeso.TheTreasurydecidedtocollapsethisperiodtozero,thusinpracticefreeingallcapital�lows.TheCentralbankseconded

22

thismove,asitallowedeliminatingthelastvestigesofcapitalcontrols,whichwasarequiredregistration(neededtobeabletotrackthis4monthperiod).Asaresult,capital�lowsstartedtoincrease,thuspushinganappreciationofthepeso.TheCentralBankreadtheensuingrealappreciationasaconsolidationofthedisin�lationofthesecondhalfof2016.Forasecondtime,readingthein�lationsignalsatthebeginningoftheyearturnedouttobedif�icult.InFebruary,asthegovernmentresumedutilitypriceadjustments ,in�lation31

pickedupagainsignallingtotheCentralBankthateasinghadgonetoofar.InfactbytheendofFebruaryin�lationseemedtobeabovethelevelsneededtoattainthe17%targetfortheyear.Thus,theCentralbankstartedtighteningmonetaryconditionsbypushingupwardstheLebaccurvestartinglateFebruaryandthenmovingthepolicyrateupwardsinApril .32

In�lationincreasedsomewhatintheFebruary-Aprilperiod,butbymid-2017,monetarytightnessappearedtobeworkingagainandin�lationwasabatingprettyquickly.ByJulyin�lationhadreacheday-o-yrateof21.4%thelowestin7years,whilewholesalepriceshadmoved13.9%inthepreviousyear.Infactinthesecondhalfof2017,whileoveralldisin�lationstalledandevenhadaspikeinDecemberresultingfromalargeadjustmentinutilityprices,disin�lationcontinuedincorein�lation.Inthelastquarteroftheyear,corein�lationhadstabilizedatanannualizedrateof18%(1,4%monthly),andexpectedcorein�lationfor2018wasjust14.7%.However,in�lationexpectationsfor2018hadincreased2.3p.p.intheprevious14months,which,togetherwiththefactthatthetargetfor2017wouldbemissedbyamarginthatwidenedtowardstheendoftheyearledtocontinueddoubtsaboutthesuccessofthedisin�lationprogram. Eventhoughcorein�lationhadactuallydecreased,ain�lationremainedabovethetarget,theCentralBankimplementedatighteningofmonetarypolicyshortlyafterthemidtermelectionsof2017(withtwohikes,oneof150bpsandoneof100bpstwoweekslater).Theintentionwastokeepthedisin�lationprocessmovingahead.WhattheCentralBankdidnotknowisthatbydoingsoithadfueledanoppositiontoitspolicieswithinthegovernmentthatwouldshortlyafterunraveltheprogram.Throughoutthisperiod,asin�lationdecreased,outputrecoveryhadbeenprettyconsistent,andhadstrengthenedin2017,whichendedwithagrowthrateof4%eop.(Figure4-Panelc)cappingsevenquartersofsustainedgrowth.Creditgrowthseemedtosupporttheclaim.Ithadalsoacceleratedin2017,reaching20%growthinrealtermsbytheendoftheyear.Thegrowthincreditrespondedtoaseriesof

31Electricitypriceswereincreased90%,naturalgasprices30%andwaterdistribution20%,betweenFebruaryandApril.32Monetarygrowthalsohadpickedupattheendofthepreviousyear,handinhandwithataxamnestyfornondeclaredcapitalabroadwhichrequiredfunnelingthetaxpaymentsthroughthe�inancialsector.This,combinedwithanabnormalreductioninthemoneybaseinpreviousFebruarypropelledtheyearonyearmoneygrowthratebrie�lytonearly50%(seeFigure4-Panelg),beforenormalizingata34%yearonyearratebyMay.TheCentralBankdisregardedthesenumbersusingtheargumentthatmoneydemandwasendogenous,butthisanyhowstirredrenewedcriticismontheCentralBankarguingitsmonetarypolicywasinconsistentwiththedisin�lationpath

23

deregulationmeasurestakentoimprovetheworkingofthe�inancialsector.Thequestionofwhetherthisinturnjeopardizedthedisin�lationprocesswasagaindisregardedatthetimebytheCentralBankontheargumentoftheendogeneityofmoney,butmayalsohaveplayedaroleinslowingsomewhatthedisin�lationpath. III. 5 The evolution of fiscal accounts Sofarwehavefocusedonmonetarypolicy,buttounderstandwhythedisin�lationcon�lictedwith�iscalpolicy,weneedtodiscusstheevolutionof�iscalaccounts.Asmentioned,thegovernmentinheritedalarge�iscalproblemandexpectedsome�iscalconvergencefromareductioninsubsidiesbutthenwasunambitious(seeTable2).Buteventhisplangotquicklyofftrackforthreemainreasons:outputdidnotgrowasexpected,taxeswerecut,andexpenditureswereincreasedinunanticipatedways.Theseeffectswereonlypartiallyoffsetbytheincomeofataxamnestywhichadded1.2%ofGDPin2016and0.3%in2017.Thatthe�iscalsituationwouldbemorechallengingthananticipatedbecameclearwhen,afewdaysbeforetakingof�ice,theSupremeCourtgrantedafavorablerulingtothreeprovincesonataxdispute(whichthegovernmentlaterextendedtootherprovinces).Galiani(2018)estimatesanimpactof1.6%ofGDPonthegovernment'saccountsbetween2016and2018,andasteadystateimpactof1%annually.Inaddition,exporttaxeswereeliminatedacrosstheboard,followedbyaseriesofothertaxcutssuchasthosetosmallandmediumsizedenterprises,andtheautomotiveindustry.Towardsoftheendof2016thegovernmentalsoincreasedtheminimumincomerequiredtopaytheincometaxandindexedthisamount.Thiscostthebudgetanadditional0.6%ofGDP.Inalltaxreductionsaddedupto2.2%ofGDP.Inadditiontothisweakeningoftheincomestream,thegovernmentimplementedanincreaseinpensionpaymentstocompensateforlackofindexationofpensionsduringtheyears2002-2006.Thisaddedanannual�lowofabout1%ofGDPofgovernmentexpenditure,plustheobligationtorepaytheaccumulateddebtswithpensionersoriginatedfromthatabsenceofindexation,whichtotalizedanadditionalstockof1.4%ofGDP.Whileutilitypriceadjustmentsprovidedadditionalresources,thede�icit,ratherthandecreasingactuallyincreased (Table2). Thetaxamnestyof2016providedsomereliefbutjustenoughtoavoidadramaticdeteriorationofthe�iscalsituation.Nosigni�icantdevelopmentschangedthispicturein2017,andwhilesuchinactionappearsdif�iculttoexplain,themarketsdidnotappearoverlyconcernedascountryriskcontinuedtofall(Figure4,panelb).Onlyafteritssuccessinthemid-termelections,thegovernmentmadeits�irstmovestoimprovethe�iscalsituationbypassingataxandpensionreform.Butthetaxreform,whileimprovingtheef�iciencyanddistributiveimpactoftaxesimpliedareduction oftaxesgoingforward .Thetwocostsavingfeaturescamefromthe33

33Thetaxreformincludedareductionincorporateincometax(thoughincreasingtaxesondistributionofdividends),theintroductionofataxon�inancialinvestmentincome,ataxexempt

24

pensionreform.Onewasthatworkersweretobeallowedtostayanextra5yearsintheirjobsiftheysodecided.Asthiswasvoluntary,itdidnotgeneratemuchcontroversy.Inpracticeitextendedtheworkingagearound3years(womenwerepreviouslyallowedtoretirebetween60and65years,andtheaverageretirementagewas63).Theotherwasrelatedtopensionindexation.AsArgentinareturnedtohighin�lationinthe2000safteradecadeofstability,itwasforcedtore-indexpensionsthathadbeenfrozenduringtheConvertibilityperiod.Howeveratthetimethereweredoubtsaboutthereliabilityofin�lationstatistics,sothegovernmentindexedpensionstoacombinationoftaxcollectionandnominalwages.Actually,itrepresentedanindexationofpensionstonominalGDP,thustriggeringanunsustainabledynamic,particularlyifArgentinawastostartgrowingagain.Thegovernmentpushedforachangeintheindexationformulathatattemptedtomoveittoamoresustainabledynamicsincreasing,theweightofpricesandshorteningtheadjustmentlags.Thesechangeshowevermet�ierceresistanceandsigni�icantunionmobilizationwhichcasteddoubtsontheabilityofthegovernmenttopushfurtherwithotherreforms.Infact,theimpactoflaggedindexationonpensionsandsocialprogramsissorelevant,thatinordertoanalyzemoreobjectivelytheevolutionof�iscalperformanceitisusefultoimplementtwoadjustments.The�irstistocorrectforthecyclicalmovementsoftheeconomy .Thesecondadjustmentcorrectsforthe34

factthatpensionandsocialaidareformallyindexedbackwards,sothattheirrealvalueisreducedwhenin�lationaccelerates,andincreasesinadisin�lation.Aroughestimateisthatthebudgetimproves(deteriorates)about0.4%foreachincrease(fall)inyearlyin�lation.Thus,anadditionalrelevantconceptinArgentinaisthe“cyclicallyadjustedin�lation-constant”budgetde�icit.Figure7showstheresults(Appendix3discussesthemethodology).TheconclusionofFigure7isthatthegovernmentshowedsigni�icantprocrastinationinthe�iscalfront,eventhrough2018.Takingintoaccounttheeffectofin�lation,the�igureshowstherewassomeimprovementin2017when�iscalaccountsabsorbedtheincreaseinpensionsresultingfromthedisin�lation,butnoeffectiveprogressin2018,whentheimprovementin�iscalaccountcanbefullyassociatedtotheaccelerationofin�lationofthatyear.Asubstantialadjustmentonlycamein2019.

minimumincomewhichreducedtheincidenceoflabortaxesforthelowerhalfoftheincomedistribution.Ataxonbankmovementswouldprogressivelybeconsideredasawithholdingofincometax.Provincesagreedtoreducethemaximumratesoftheturnovertax(thoughsomeprovinceswhichwerebelowthesemaximausedtheopportunitytoincreasetaxes).Inall,thetaxreformanticipatedagradualreductionofthetaxburdenreaching2.9%ofGDPby2022.Thereformalsosolvedatwo-decades-longcon�lictwiththeProvinceofBuenosAires,whosetransfersofincometaxhadbeencappedand,inpractice,hadbeenphasedouttoautomatictaxtransfersfromtheincometax.Inall,thisinitialadjustmentwaspaidbythenationalgovernment,thoughfuture�lowswouldaccrueonamorebalancednature.34WefollowthestandardmethodologydetailedinEscolano(2010).SeealsoGirouard&Andre(2006),Daudeetal.(2010),Larch&Turrini(2010),Fedelinoetal.(2009)

25

Thelackofadjustmentinthe�iscalaccounts,plusachangeintheprivatesectorsavingsdecision(fromalargesurplustoasmallsurplus),ledtoasigni�icantdeteriorationofthecurrentaccount.Formany,thiswastheweakestlinkintheprogram,andwhatrendereditunsustainable.

Figure7.How�iscaladjustmentcameonlyin2019

III. 6 The Balance sheet of the Central Bank and the issue of the Lebacs TheprogramstartedwithaweakCentralBank(Figure2),withnetworth,netofLetrasIntransferiblesandAdelantosTransitorios,amind-bogglingUSD93bnnegative.TheCentralBankbalancecarriedliabilitiesof5.7%ofGDPinLebacsandrepos,anumberthatgrewto6.9%inMarchof2016whentheCentralBankhadsterilizedthebulkofissuancearisingfromthedollarfuturesliabilitiesandatleastpartofthemonetaryoverhang .35

Aftertheagreementwiththeholdoutstheeconomystartedexperiencingacapitalin�lowprocessfromtwosources.Onewastheexternal�inancingofthebudgetde�icit(ofboththenationalgovernmentandprovinces)thatwasprimarily�inancedabroad.Thesecondwereprivatesectorin�lows.WhiletheCentralBankremovedtheEuroclearibilityofLebacsearlyoninanattempttofendoffprivatespeculativecapitalin�lows,aftertheTreasuryremovalofthestayperiodonlocalinvestmentsatthebeginningof2017,in�lowsincreased.

35Inthe�irstweekstheCentralBankandtheTreasuryagreedtoexchangeUSD16bnofLetrasIntransferiblesformarketablegovernmentbonds,thussomehowcompensatingpartofthedeteriorationinthebalancesheetofpreviousyears(seeFigure2).Howevertherewasanagreementthatthesedebtwouldnotbeusedforopenmarketoperations.Asaresult,whileitimprovedsigni�icantlythebalancesheetitdidnotprecludetheneedtoissueCentralBanksecuritiesformonetarypolicy.

26

Figure8.TheparallelgrowthofreservesandCentralBankliabilities

27

PanelgandPanelhinFigure8showthesourcesofthiscapitalin�lows,showingthatthelion'ssharewheretheresultofcapitalin�lowsfromthegovernmentsectorindebtedness.Privatesector�lowswerenonexistentin2016andrelativelysmallin2017.In2018theout�lowswerelargerthanthein�lowsofthetwopreviousyears,asalargeportionoftheseout�lowswerefromresidents.Insummary,thechallengeposedbycapital�lowswasmoreanissueofgovernmentindebtednessthanahotmoneyissue,theseprobablycontainedbythefactthattheexchangerate�loated.TheCentralBankconfrontedgovernmentsectorindebtednesswithanaggressiveprogramofreservesaccumulation,buyingreserveswhichitsterilizedbyissuingpesoliabilities(calledLebacs) .Doingsoreducedthecurrencymismatchofthe36

consolidatedgovernmentbalancesheet,andalsoreducedtheexchangerateappreciationresultingfromthein�lows,butalso,indoingso,conditionedthein�lationobjectivetoanexchangerateobjective.EventhoughthegrowthinLebacshaditscounterpartintheaccumulationofreserves,adebateemergedregardingthegrowthinthebalancesheetoftheCentralBank,evenwhile,asshowninFigure8-Panelc,theratioofFXbackingofCentralBankinterestbearingliabilitiesimprovedsteadilythroughouttheprocess. Thedebateheatedup,particularlywhentherealexchangerateappreciated,asthisresultedintheCentralBankpayingacost(expost)intermsofcarry,acostthatincreasedthebiggerthereserves.Figure8-Paneldshowsthatbytheendof2017thecumulativeexpostreturnindollarspaidtosterilizereservesreachedamaximumofabout20%forthetwoyears.Thereisalargeliteratureonreserveaccumulation,evenforthecaseinwhichreservesare“borrowed”aswasthiscase.Rodrik(2006)arguesthecostisnotlargerelativetotheinsurancebene�its,LevyYeyati(2006and2019)arguesthecostsissmallerbecauseoftheirpositiveeffectincountryrisk.Additionally,historicalevidence(seeDelaTorre,Levy-YeyatiandPienknagura,2013)suggeststhatCentralBankstypicallygainfromsuchpurchasesbecausetheytendtobuyreservesatmomentsofFXappreciation,andtosellinmomentsofturbulence,sothatthecostisfurtherdecreasedbyanaturaltimingtothemarketofpurchasesandsales.Inthiscase,however,giventhatthe�inancingforreserveswaspesoandnotdollardebt,thediscussionwaswhetherthestockwasunsustainableorwhetheritwassustainableonlyinahighin�lation/devaluationscenario,alongthelinesofCalvo(1988,1991).Alternatively,thediscussionwasframedasiftheinterestonLebacswereasourceofin�lationitself,requiringadistinctionbetweentheCentralBankquasi-�iscalde�icit(which,asmentionedbefore,typicallyendedinasurplus)andthecashquasi-�iscalde�icitwhichwastheamountofpesosissuedregardlessoftheassetsideofthebalancesheet.Accordingtothisview,ifthegrowthintheLebacsbecame“money”theycouldtriggeranincreaseinthein�lationrate(asinPhelan

36Sturzenegger(2019)providesajusti�icationbycomparingreservestothoseofotherLatinAmericancountries.TheCentralBankdecidedtobuythesereservesasthegovernmentrequired,nottimingittothedevelopmentsoftheFXmarket.Asaresult,thesepurchaseswerenotdisruptiveofthefunctioningoftheFXmarket,thisallowedtosustaintheideaofa�loatingexchangerateregimeinspiteoflargepurchasesofFX.

28

andBasetto,2015).Thequestionboilsdowntowhetherremuneratedliabilitieswouldbepaidthroughanincreaseinthepricelevelorabsorbedthroughthemonetizationoffutureincreasesinthedemandforrealmoney. ThreeargumentssuggestthatthereductionofCentralBankliabilitiesneedednotbedonethroughin�lation.First,thatCentralBanksbalancesheetdonotacknowledgetheirstrongestasset:thenetpresentvalueoffutureseigniorage.AnestimateofthisseignioragebytheCentralBank(BCRA,2017)placeditat30%ofGDP,muchlargerthanthestockofLebacs(whichreached11%atitsmaximum).Second,thatassumingnofurtherpurchasesofreservesandusingmarketexpectationsforinterestrate,growthandin�lationthestockofLebacshadstabilizedbytheendof2017(asshowninFigure8-Panelb).Finally,thatthereservesthemselvescouldbeusedtocanceltheseliabilities.ForthesereasonstheCentralBankconsideredthatthesituationwassustainable,aviewthatwassharedbythemarketsbutnotthemajorityofanalysts.SothequestionwasnotsomuchwhetherCentralBankliabilitieswouldcreatein�lationperse,butwhetherthegovernmentwoulddecidetopaythemwithin�lationtaxratherthanwithseigniorage.Whiletheaccumulationofreservesduringthisperiodwasnotcontroversial,itscounterpart,theaccumulationofliabilitiesthat�inancedtheaccumulationwascontroversial.ThequestionofwhetherArgentinawouldhavefaredbetterifthesereservesandliabilitieswerenotaccumulatedisnotasettledissue.Wewillcomebacktothisinthe�inalsectionofthepaper.A�inal,butrelevantpointreferstothematurityofCentralBankliabilities.Duringthesecondhalfof2017,concernedwithrolloverrisk,theCentralBankhadextendedmaturities byincreasinglongratesonLebacs,(seeFigure8-Panelf,37

thatshowsthatLebacsmaturingeachmonthhadfallenfrom60to30%ofthemoneybase).AlongliteraturestartingwithCole&Kehoe(1996),(includingtheGreenspan-Guidottirule)payattentiontotherelationshipbetweenshorttermdebtandreservesaskeyforavoidingmultipleequilibria.Inthenextsectionwediscusstheimplicationsofthedecisiontoshortenthesematurities.

IV. The unraveling of the program IV. 1 The change in targets and the start of the crisis InJuly2017in�lationwasdecreasingrelativelyquickly,priceshadrisen21%inthepreviousyear(afallofmorethan15pprelativetosixmonthsbefore).andwholesalepricesjustshyof14%.Thisquickreductioninin�lationrepresentedachallengeto�iscalaccountsbecauseofthedynamicsofbackwardindexationonhalfitsspending.Hence,theTreasurystartedpushingforincreasingin�lationtargetstoensureaslowerdisin�lationpath.Inaddition,theCentralBankhadtightenedmonetarypolicyintheaftermathofasuccessfulmidtermelection,which

37ThisstrategywasalsofollowedwithsuccessbyChilein2003,reducingexposuretorolloverrisk.ForananalysisofthematurityofcentralbanksecuritiesseeMohanty&Turner(2005)andGray&Pongsaparn(2015).

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ralliedotheractorsbelievingmonetarypolicywastotight,againsttheCentralBank.As2017cametoanend,theFinanceMinisterstarteddoubtingwhetheritwouldbeableto�inanceabroadthestubbornde�icitandstarteddemandingthattheCentralBankshortenitsmaturitiesinthelocalpesomarket.TheCentralBank´sefforttoextendmaturitiesandreducerolloverriskthathadcomeatthepriceofincreasinglongerrates,makinglocal�inancingmoreexpensive.Bytheendoftheyearmostvoices(Treasurywantingslowerdisin�lationfor�iscalreasons,FinancewantingshortermaturitiesforLebacs,othermembersofCabinetwantinglowerinterestrates)werechallengingCentralBankpolicies.Afterastrongshowofsupportinthemidtermelectionsof2017theExecutivedecidedtomoveaheadandchangethein�lationtargets,eventhoughtheleit-motivattheCentralBankhadbeenthat“tochangeatargetisnottohaveone”.ThechangeinthetargetswasannouncedDecember28th,2017,inarelativelybizarretwist,asthatdayArgentinacelebrates“foolsday”.Tocommunicatethechangethegovernmentstagedapressconferencewhereitannouncedthatitwantedmore in�lation.ThePresidenthaddecidedto�iretheGovernorifneededtogoahead.SotheCentralBankwasconfrontedwithanExecutivethathaddecidedtolowerrates,increasethein�lationtargets5p.p.(from10to15%),andshortenthematurityofCentralBankliabilities(basically1-5months).InanattempttocontainthecredibilityeffectareductionintransfersfromtheCentralBanktotheTreasurytohalfin2019andtotheequivalentofseignioragestartingin2020wasalsoannounced.Manycountriesexperiencedifferencesrelativetotheirtargets(Colombia,forexample,sustaineddeviationsfor6yearsinarow),particularlyduringdisin�lationepisodes.Yetthetargetsoperateasanexpectationsanchorregardlessiftheyareachievedornot.Inrecentepisodes,thereare3casesofincreasesinin�lationtargets.Indonesiain2005,Brazilin2003,Turkeyin2008 .Boththecasesof38

IndonesiaandBraziloccurredafteralargedevaluationthathadgottenthein�lationprocessoutoftrack,generatingasigni�icantincreaseinin�lationrelativetothepreviousyear.InthecaseofIndonesia,in�lationhadbeen17%in2005,sothetargetfor2006and2007wasmovedupwards,whilekeeping�ixedthe5%longerrunobjective.InBrazil,in�lationhadmovedfrom5%in2000to12.6%in2002(whenthetargetwas3.75%),thusthetargetwasadjustedfor2003.Inneithercasewasthereachangeinmonetarypolicy.AndwhileIndonesiaconvergedtoitslongtermin�lationprettyunscathed,Brazilstruggledtoreachitstargetslateron,(12yearslaterin�lationwasstillabove10%).ThecaseofTurkeyissimilartothatofArgentina,becausethein�lationtargetwaschangedinthemiddleofasuccessfuldisin�lationprogram.Turkeyhadstarteditsdisin�lationprogramwith

38SeeOECDEconomicSurveys(2008)forthecasesofIndonesia(p.32)andTurkey(p.112).ForthecaseofBrazil,seetheletterfromBancoCentraldoBrasiltoMinistrodeEstadodaFazenda(2003)explainingthedeviationsfromthein�lationtarget,andGarcia(2006).ForadditionalinformationofTurkeyseeKara(2006,2007).Romaniain2018wouldbeanadditionalcase,butthechangewasnotsigni�icant,soinpracticenoncomparabletothesecases.

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in�lationrunningat70%,whenitsetatargetof35%(20%and12%forthefollowingtwoyears).Bytheyear2008,thetargetwas4%,but,as�inallythein�lationwentupthatyearfrom8.4%in2007to10%,theydecidedtochangetheirtarget.Theynearlydoubleditfor2009,from4%to7.5%,andalsoraisedto6.5%and5.5%thetargetsfor2010and2011.ThischangeshadalastingimpactoncredibilityandTurkeyisstilltodaystrugglingtoattainitsin�lationtarget.Insummary,theprecedentsforsuchamovewerenotauspicious.Thus,itwasnotsurprisingthattheinitialresponseofthemarketwasofdisbelief.However,giventhatlocalnewshadindicatedthatthegovernmentwasaskingtheCentralBanktoreduceratesby400bps ,whentwoweeksaftertheannouncementtheCentral39

Bankreducedtheinterestrate75bpsfrom28.75%to28%,thenewswerereceivedbythemarketwithasenseofrelief,asitwassuf�icientlymoderatetobereadasanaf�irmationoftheindependenceoftheCentralBank.Thepesoappreciated,andspreadsstabilized.Thegovernmentmanagedtosqueezewhatwouldbeits�inalbondissueforUSD9bnininternationalmarkets.However,when,theCentralBankimplementedanadditionalreductionof75bpstwoweekslater,withoutanyreasonablejusti�icationforit,themarketconcludedthattherehadbeenalargeinstitutionalshift.Thepesodepreciatedagain,andthespreadondollardenominatedgovernmentbondsincreased.BytheendofthemonththespreadofArgentinedebtrelativetoemergingmarketshadquadrupled.In�lationexpectationsfor2018withstoodattheendof2017at17.4%foroverallin�lation,jumpedinJanuary,to19.4%,anincreasethatwaslargerthanthatoftheprevious14monthscombined.Infact,evenwhennofurthercutsininterestrateswereimplementedafterwards,corein�lationcontinuedtoincreaseandthespreadongovernmentbondscontinuedtoraise.Thelossofcredibilityhadbecomeapermanentshock.Figure9showshowpricesandexpectationsunanchoredafter28D.Italsoshowsthatcountryriskstartedescalatingafterthechangeintargetsindicatingthattheannouncementhadbeenreadaschangebothin�iscalaswellasinmonetarypolicy.Aspartoftheannouncementsof28D,theCentralBankreducedtheinterestrateonlongerLebacs,andinAprilannouncedthatitwouldnotissueLebacslongerthan�ivemonths.Boththingsstartedpilingupthematuritiesintheshortend,reversingtheliabilitymanagementthattheCentralBankhadachievedinthesecondhalfof2017andsigni�icantlyincreasingtherolloverriskofLebacs.AscanbeseeninFigure8-Panelf,Lebacauctionshadbeenreducedfrom60%ofmoneybaseto30%byDecember2017,butthisprocesswasfullyreversedin�irstmonthsof2018.Thiswouldturnouttobeacostlymistake,infact,whilethishadbeenadecision,marketparticipantsreaditasareactiontodif�icultiesinrollover,thusthemovefeditselfintothisperception.FacingdwindlingcredibilitytheCentralBankandtheExecutivedecidedtotrytoreaf�irmcredibilitybyfocusingontheobjectivethatwagenegotiationsshouldcloseinlinewiththenew15%in�lationtarget,aswellascontainingtheexchange

39SeeBurgo(2018).

31

rate,whichledtointerventionintheFXmarketduringmostofmarch.TheCentralBankhopedthatthemarketwouldreadthesupportoftheexchangerateasaprecommitmentonfuturemonetarypolicy.Butaftertwoyearsofalmostfree�loating,theinterventionsonlyincreasedtheconfusionaboutthemonetaryregime.Infact,expectationscontinuedtoanticipateasigni�icantlooseningofmonetarypolicy.Ratesremainedunchangedbutthiswasnotenoughtochangethisview.Asuncertaintyontheeconomicprogrammounted,thereweregrowingworriesonthefeasibilityofArgentinarollingoveritsdebt.Inthisunfavorablecontext,onApril24anewtaxon�inancialincomeapprovedinthe�iscalreformattheendofthepreviousyear,cameintoeffect.The�irsttranchetobeimplementedwasataxonnon-residents,onallinstruments,includingCentralBanksecurities.TheresultwasamassiveexitfromgovernmentpaperandLebacs.TheCentralBankinterpretedthisasaspeci�icportfolioshiftanddecidedtoredeemtheLebacsinexchangefordollars,avoidinganexchangeratejump.TheCentralBanksoldUSD1.472mnonApril25thandUSD5.3bninthe�irstweekofthecrisis.ThestockofLebacsfellARS137.000bn,roughlyanequivalentamount.Concernedwiththein�lationprocess,theinitialsalesweredoneattheongoingexchangerate.TheCentralBankarguedthatthepesohaddepreciatedsigni�icantlyrelativetoothercurrenciessincetheendof2017,sothatitwasnotclearthatafurtheradjustmentwouldbenecessary.Inthisviewthesaleofreserves,wasawayofaccommodatingtheportfolioshiftavoidingexcessivevolatilityintheexchangerate.IttooklessthanadayfortheCentralBanktorealizethatmuchmorewasatstake,asothercurrencies,particularlytheBrazilianRealandtheTurkishLiraalsocameunderattack,probablyinresponsetoaprocessoftighteningofinterestratesintheUS.ThisputtheCentralBankinabind:itwasusingtheexchangeasasubstituteanchor,giventhatitscredibilityhadbeenwornoutbytheannouncementsofthe28D,butthatcon�lictedwiththeneedtoadjusttheexchangerateinadeterioratingcontextwheretwoexogenousfactorsbecamemorevisible:aseveredrought,thelargestin70years,inadditiontothehikeininterestratesintheUS.SotheCentralBankmovedtoastrategyofleaningagainstthewindinanattempttosmooththeexchangeratemarket,whilenotnecessarilygoingagainstanadjustmentoftherealexchangeratethatitwouldnotbeabletoputoff.Simultaneously,alongthewayitwouldusethesaleofreservesasawayofcancellingCentralBankliabilities.ThisstrategywouldcontinueuntilOctober,whentheCentralBankexitedtheFXmarket.Bythen,itwouldhavesold13.5bnUSDofreserves,andwouldhavereduceditsLebacstockby617bnARS.Thecombinationofthedepreciation,theincreaseincountryrisk,andthedrought,ledtosharpcontractionineconomicactivity.ByMay,astheexchangeratecontinuedtosearchforanewequilibrium,thesuddenstopaggravated.Thelackofclarityinexchangeratepolicydidnotallowtocoordinateexpectations.Withaccesstomarketsclosed,aswasmadeclearbyacoupleofunsuccessfulgovernmentdebtauctions,thegovernmentswiftlyactedandsoughthelpfromtheIMF.Yettheannouncementdidlittletocalmthemarket.

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Figure9.MainVariablesafter28D

33

Inthemeantimethepolicyratewasincreasedto40%inanattempttocalmtheturbulencewithonlypartialsuccess.DuringthistimetheCentralBankcontinuedtoselldollarsagainstLebacs.Intheweeksthatfollowed,however,theclimatecontinuedtodeteriorateandtherolloverofLebacsbecameasourceofconcern.Inordertoqualmexpectations,onMay14theCentralBankcommittedUSD5bndollarsatarateof25ARS/USD(avaluemorethan40%abovethelevelofmiddecember),thusimposinganupperbandtotheexchangerate.ThiscommitmentbroughtsomereliefandallowedforanewissueofUSD3.0bninpesodenominatedbondsonMay16th.ItwasdecidedthattheproceedswouldbesoldbytheTreasuryratherthanboughtbytheCentralBankashadbeenthecasethroughoutthe�irsttwoyears.Buttheseresourcesquicklydwindled,whiletheauthoritiesoftheCentralBanktriedtobridgethetimegaptoanagreementwiththeIMFminimizingCentralBankFXintervention. Twosourcesofconcernstartedmounting,bothrelatedtotheongoingdiscussionswiththeIMF.First,thatitwasbelievedthattheIMFthoughtamuchhigherexchangeratewasneededtodealwiththesuddenstop,andsecondthatitwasunderstoodthattheIMFwouldconstraintheuseofCentralBankreserves.Inthatcontext,thepolicyofredeemingLebacswithreservescouldbediscontinued.BothideasincreasedtherunonLebacsandthepressureontheFXmarketinanticipationoftheIMFdeal.WhiletheCentralBankhadpiledreservesaconcernhadbeenthatreservesmaybeusedforotherpurposesandthebackingoftheLebacsspentaway,forcingtheCentralBanktomonetizeitsliabilities.Actuallytheoppositeoccurred.Astrongsocialandmediapressuredevelopedto“protect”thereserves,asifsocietypreferredtoreduceitsliabilitiesthroughin�lationratherthanrelinquishingthisasset.Thus,astheCentralBankcontinuedtoreducethestockofLebacsagainstthesaleofreservesitstartedtoreceivegrowingcriticism.ThisaddedtotheargumentssuggestingthattheCentralBankmayeventuallystopsellingreserves,acceleratingtherun.Paradoxically,theaccumulationofreservesdidnotservetoeasefearsofpotentialinstabilities,butneitherdidthereductionintheliabilitiesthatwerethesourceofconcerninthe�irstplace.IV. 2 The IMF program TheIMFbelievedthatArgentinahadsufferedasuddenstopasaresultofslow�iscalconsolidationtogetherwithaninstitutionaldeteriorationinmonetaryinstitutionsasaresultof28D.Thus,naturally,thefocuswasplacedinimproving�iscalaccountsandrecomposingthecredibilityoftheCentralBank.TheagreementwiththeIMFledtorelativelytimidadjustmentsin�iscalnumbers(aprimaryde�icitof2.7%ofGDPin2018wouldbereducedto1.3%in2019,reachingequilibriumin2020)intheshortrun,whiletransfersfromtheCentralBankwouldbeforbidden.ToavoidfurtherinterferencewiththeCentralBank,anewlawenshriningtheindependenceoftheCentralBankwouldbesenttoCongress.Inadditionthegovernmentcommitteditselftobuybacksomeofthe

34

debtissuedtotheCentralBanktostrengthenitsbalancesheet.TheexpectedimpactontheevolutionofLebacsisshowninFigure8panele.Theprogramwassuf�icientlylargetoallowArgentinatorollovermostofitsdebtand�inanceitstransitoryde�icit,andbecamethelargestprogramintheIMF´shistory,commitingUSD50bn.Theprogrammaintainedthemaintenetsofthemacroframework,in�lationtargetingand�loatingrates.But,giventheaccelerationofin�lationwiththecrisis,noin�lationtargetwasestablishedfortheremainderoftheyear(onlyaprojection).Thetargetforend-2019wouldbe17%theoriginalupperboundofthetargetfor2017.Therewouldbeminimalinterventionintheexchangeratemarketandifneededimplementedthroughtransparentauctions.WhiletheCentralBankintervenedsporadicallytomaintaintheexchangeratewithincheckuntilthelaunchoftheprogram,atthestartoftheprogramtheCentralBankeliminatedthecapontheexchangerateat25pesosperdollar,andexitedtheexchangeratemarket.Theexchangerateexperiencedasigni�icantjumpthatday,whichwasconsideredunacceptabletotheExecutiveandledtothereplacementoftheGovernoroftheCentralBank. IV. 3 Monetary experiments Thenewgovernorhadtwoviews.The�irst,thattheexchangeratecouldbeplacedatwhateverleveltheauthoritiesdesired,irrespectiveofmonetarypolicyorexpectations.Allthatwasrequired,wasasmartwayofinterveninginthemarket,squeezingtheshortsoutoftheirpositions,anddiscipliningtraderswithsurpriseinterventions.Thesecondbeliefwasthatthegovernmentcouldaidinthesterilizationefforts,sothatwithappropriatecoordinationLebacscouldbepaidbackinpesosandreplacedbygovernmentdebt.Thereisalargeliteratureonexchangerateinterventions andthereisevidence40

thatinterventionthroughreserveaccumulationaffectstherealexchangerateintheshortandmediumterm.Alsothatinterventionmayhelpreducethevolatilityofexchangerate�luctuations.Carstens(2019)providesarecentreview.Butthereislittleliterature,ifany,thatfocusesonthewithindaystrategyofinterventionwhichwasthetooltheCentralBankarguedwouldbeusedtoaffectexchangeratedynamics.Figure10triestoshedsomelightontheissuebyshowingthetradedvolumeinthemarketbyprivatepartiessincetheopeningoftheexchangeratecontrolsattheendof2015.In2018discretionaryinterventionsledtoanincreasinglossofliquidity.Thus,theattempttoprovideliquiditytothemarket,oneoftheobjectivesofintervention,becamesomewhatselfdefeating,astheirrumptionoftheCentralBankasanadditionalplayertendedtodryliquidityasmarketparticipantsretrencheduntiltheycouldbetterassesswhatthis“large”playerwasdoing.Whiletheabove,cannotaddresscausality,orbeconclusiveonthispoint,itsuggeststhat

40AgoodsurveyisChamonetal.(2019)areprovidedbyAgenorandPereiradaSilva(2019).

35

discretionininterventionsmaybeinthemselveshighlydisruptiveofthemarket.InfacttheIMFarguedthatinterventionsshouldoccurthroughauctions,astransparentinterventionswouldbelessdisruptiveofthemarket.

Figure10.Howinterventiondriesthemarket

InordertoaddresstherunonLebacstheCentralBankincreasedinterestratesfurther,eliminatedtheupperbandoftherepocorridorandreserverequirementsweresharplyincreased(3p.p.onJune21st,3p.p.onJuly2nd,and2p.p.onJuly18th).ThegovernmenthonoredpartiallyitscommitmenttocancelsomeofitsdebtwiththeCentralBank(ARS39.4bnduring2018). ButtheturningpointoccurredinAugustwhentheCentralBankdesignedastrategytoreducethestockofLebacs.Theideawasthatthegovernmentwouldissuedebtto“sterilize”themoneyprintedasLebacswerepaidoutatapreestablishedpace.TheCentralBankitwasreadytoselldollarsifnecessarytocontainmoneysupplygrowth.InadditionbankswerenotallowedtorenewLebacpurchases,forcingthemtomovetoLeliqs,anotherCentralBankliability,butthathada7-daymaturityandcouldonlybeheldby�inancialinstitutions .41

OnAugust15theCentralBankallowedARS100bn(USD3.3bn)tomature,butthenonlysoldUSD1bnintheFXmarkettocompensatethemonetaryeffect.Thereleasedstockofpesosrepresentedajumpinthemonetarybaseof16%,thatshortlyafterfuelledarunontheexchangeratethatjumpedfrom30ARS/USDto39.60ARS/USD,andfurtherunanchoredprices(seeTable5andFigure9).TheendresultwasthatthegovernmentreducedthestockofLebacsthroughanin�lationshock.

41Fromthenonwards,investmentsinpesoshadtobedonein�inancialinstitutionswholaterboughttheLeliqs.Thisimpliedthatthevolatilityofcarrytradewastransferredtothe�inancialsector.Towardstheendoftheterm,thisbecameasourceofconcern.

36

AstheFXdepreciatedthevalueofCentralBankliabilitiesindollarsdecreasedfromaboutUSD70bntoUSD20bninDecember.Thisresultedfromareductionfromthesaleofreserves(USD15.9bn)andfromthedevaluationitself(USD35.4bn).Thecombination,wipedoutthefullstockofunbackedliabilitiesasseeninFigure8.Asaresultofthelargemonetaryshockin�lationmovedastepupwards.Ithadbeenhigherthan3%sinceJune,butreached6.5%inSeptemberand5.4%inOctober.Thecombinationofthede-anchoringofprices,thejumpintheexchangerate,andcontinuedinterventionintheFXmarketinviolationoftheagreementwiththeFund,ledtotheoustingoftheGovernor,asthegovernmentrealizeditneededtoimplementanewrevisionintheprogramwiththeIMFtocalmexpectations.Bythen,thedecisiontoreducetheburdenofpesoliabilitiesthroughasigni�icantjumpinpricescameatacostintermsofafurtherdeteriorationofcredibilityandtheneedtokeepextremelyhighnominalandrealinterestratesgoingforwardthusthwartinganypossibilityofeconomicrecovery. VI. 4. The IMF II program Thenewprogramagreedonafasterdisbursementoffunds,inexchangefortightermonetaryand�iscalpolicy.Thetargetfortheprimary�iscalresultfor2019wasimprovedfrom-1.3%to0%.Onthemonetaryside,theprogram�ixedmonetaryaggregates.AsdiscussedinSectionII,�ixingmonetaryaggregatesneedstodealwiththevolatilityinmoneydemand,thatappearstobeexceptionallyhighinthecaseofArgentina .Theseuncertaintiesimplythatanyprogramfocusedin42

stabilizingaggregatescouldfacesubstantialdeviationsintermsofitsobjectivetoachievedisin�lation.Theprogram,wasmarketedasaprogramwherebasemoneygrowthwouldbezero,butitstartedimmediatelyafterthebigshockinmoneysupplyofAugust,andallowedanadditionalincreaseinmoneysupplyinDecemberforseasonalreasons,butwhichneedednotberevertedlateron.Sotheinitialmonetaryconditionsturnedouttoberelativelylax.Theprogram,nevertheless,wasaninitialsuccess.In�lationdynamicsnotonlystabilizedbutreversed,asre�lectedbyasharpdropinrunningweeklyin�lation,aswellasinin�lationexpectations(Figure9-PanelcandPaneld).Accordingtoweeklydatain�lationinNovemberwasonlyslightlyabove1%.Atthesametimetheinterestrate,nowendogenous,startedabove70%.Attheeconomy,persistedinitsdeeprecessionalltheconditionsforaquickdisin�lationwereinplace.Awidebandwasestablishedwithinwhichexchangerate�luctuationswouldbeallowed,butwithamonthlydepreciationtrendof3%.Foracoupleofweeksthegovernmentseemedtobuyintotheprogrambystatingthatwagenegotiationswouldbefreebutthatagentsshouldtakeintoconsiderationthefactthatmoneysupplywouldnotgrowthefollowingyear.Butshortlyafterstartedsuggestingwagenegotiationsinthe20/25%range,inconsistentwiththemonetarytarget.InfactCentralBankof�icialscommentedthataftertheNovemberdisin�lation,theTreasuryaskedtheCentralBanktoincreasethein�lationrate,toavoidthelagged

42Seefootnote13.

37

effectonpensionsthatcouldcompromisethe�iscalobjective(adiscussiononthespeedofdisin�lationreminiscentoftheonethatledtothechangeinin�lationtargetsayearbefore).Thus,theCentralBankextendedthehighrateofdepreciationforthe�irstquarteroftheyear(2%monthly).Thecon�irmationofthislargeexpecteddepreciationinto2019,wasverydetrimentaltoexpectations(seeFigure9),asitimpliedthattheCentralBankitselfdidnotbelievedadisin�lationwaspossible(orthatithadbeencompromisedbyanexchangerateobjective).ThelargejumpinmoneysupplyofAugustandDecemberwasnotreversedinJanuaryandFebruary,whenmoneydemandfalls.ThefactthattheCentralBankallowedtheinterestratetoplunge(itfellfrom59.25%attheendof2018to44.21%onFebruary15th2019),impliedthatitdidnotabsorbthisoverhang.TheresultwasasharpdepreciationinMarchandApril,andaverysteepincreaseinin�lation,thatreached4.7%inMarchgeneratingapoliticalearthquakeandseriouslycompromisingthegovernment'selectionprospectsforanelectionthatwasnowonlysixmonthsaway.ByearlyMarch,andaspoliticaluncertaintyincreased,theCentralBankrealizedthatitsmonetarytargetsweretoolax,andstartedcontractingthemoneysupplyandincreasingtheinterestrateregardlessofthetarget,andinAprilitfrozetheexchangeratebandsthroughtherestoftheyearwhilecommittingtofreezemoneysupplyuntilDecember.Atthesametime,itstartedgeneratingamorestablepathfortheinterestrate.SoinafewmonthstheCentralBankhadcomefullswingbacktoaprogramwithexchangeratetargetingandinterestratesasitsprimarypolicyinstrument.However,theexchangerateremainedunstable,so,inApril29th,theCentralBankannouncedthatithadobtainedawaiverfromtheIMFandhadbeenallowedtointervenewithintheexchangerateband.However,theCentralBankmadesurethatnointerventionwasnecessary,bykeepingrateshigh.Afewdayslater,thegovernmentannouncedaVPcandidatethatwaswellreceivedbythemarket,thusstartedabriefcycleofstabilizationanddisin�lation.Atthetimeofthewriting,theCentralBankfacedthechallengeofanincreaseinmoneydemandasaresultofin�lationwithaprogramthatrequiredkeepingmoneysupplyconstant.InJune,theCentralBankreactedbyreducingreserverequirements.Thisallowedittokeepcompliantwiththeprogram(whichonly�ixesbasemoney),thougheasingmonetarypolicy.AtthebeginningofJulyitfurtherreducedreserverequirements,todealwiththehighpositiveseasonalityofmoneydemand,butsimultaneouslycommittedtoreducethemonetarytargetsbyanequivalentamounttwomonthslater,afterseasonalityabated.ThismeasureentailedasharpcontrastwithwhathadbeendoneinDecember,whenaggregateshadincreasedbutnotreversedlateron,andstrengthenedthecommitmentoftheCentralBanktoatightmonetarypolicy.Asaresultin�lationratestartedabatingreaching2,2%inJulythelowestnumberinayear.However,theopenprimariesinAugustdeliveredaheavyblowtothegovernmentandincreaseduncertainty.AsMacri´sgovernmentseemedtobeheadingtoalossinthepolls,theendofthefour

38

yearsweremarkedbyacceleratingin�lationanddepreciationasthemonetaryframeworkagainseemeduncertain.V. Lessons learned TheMacriadministrationimplementedalax�iscalprogram�inancedwithshorttermexternaldebt,togetherwithanITprogramwitha�lexibleexchangerate.Fiscalconsolidationlagged,whileathedisin�lationcompromisedfurtherimprovementsin�iscalresultsasaproductoflaggedindexationofabouthalfthespending.Thisledtoachangeinthedisin�lationprogramimplementedthroughachangeinin�lationtargets.Theuncertaintiesthisgeneratedonthemacroeconomicframework,coincidedwithatighteningofratesintheUSandaseveredrought.Thesefactors,combined,generatedtheingredientsforasuddenstopthatledtoasharprecessionandanabruptadjustmentoftheexchangerate,whilethegovernment,slowlyat�irst,butverydecidedlyin2019,tackled�iscalconsolidation.Andwhilethisseemedtoprovideachanceatstabilization,thewithdrawalofpoliticalsupportanddoubtsaboutthepoliciesofthefuturegovernmentprecipitatedtheeconomyagainintoturmoiltowardstheendoftheterm.Fromapolicyperspective.ThefouryearsofMacri’spresidencyposeanumberofquestions.Was�iscalgradualismamistake?Was�iscalpolicyadequate?WasITtoofastandaggressive?Wasthechangeintargetsjusti�ied?Wasaimingfora�loatingrateamistake?Wastheaccumulationofreserves(andLebacs)excessive?Wasthe�inancingstructureof�iscalde�icitscorrect?Wasthereactiontothesuddenstopadequate?Werethepoorresultsderivedfromdomesticorexternalfactorsorjustbadluck?Thispaperhastriedtoprovideevidenceandanalysiswiththesequestionsinmind.Inwhatfollowwetrytosummarizepossibleanswerstothesequestions.Was gradualism a mistake? Aswementioned,gradualismwasmoreapoliticalchoicethananeconomicone.Therisksofgradualism:higherdebtandalargerriskofacrediteventwerewellunderstood.Theobjectiveofgradualismwastobuildadifferentsortofcapital,apoliticalcapital,thatcouldbehandyintimesofneed.Themarketsapprovedthestrategyandcountryriskactuallydecreasedthroughoutthe�irsttwoyears,reachingaminimumafterthemidtermelections.So,gradualismprovidedafeasiblepathforreform.Afterthemidtermelectionsthegovernmentrelaxedboth�iscalandmonetarypolicy.Thisledtoaquickreversalofexpectationswhichisresponsiblefortheturnaround,notgradualismperse.Was fiscal policy adequate? Evenifgradualismmayhavebeenafeasibleandcorrectchoice,weshowedthat�iscalpolicyactuallymovedintheoppositedirection.Ratherthanimplementinganactualgradualreductioninthede�icit,thede�icitinitiallyincreased ,andevenwhilemarketswerecondescendentwiththis,itbuildsigni�icantrisks:ontheonehand,itnotonlyrequiredstrongeractiondowntheroad,butthesustainedweaknessin�iscalpolicyforcedthechangeinin�lationtargets,underminingthecredibilityofthewholeprogram.While�iscaldominancewas“contained”by�ixingthetransfersfromtheCentralBank,adifferentsortof�iscaldominanceemerged,andturnedtobecritical:theneedforthepathofdisin�lationtobeslowtoavoidalarge�iscaleffectfrombackwardindexation.The

39

inconsistencybetweenthespeedofactualdisin�lationand�iscalneedsledtoareversalofthetwostabilizationprograms,�irstintheformofachangeinthein�lationtargetsandsecond,aftertheIMFII,bysettingalargerateofdepreciation.Inthissense,lackofprogressonthe�iscalfront,turnedtobeessentialforunderminingthestabilizationattempts.Infact,thedeviationwassolargerelativetotheanticipatedpath,thatweshowed(Figure7)that,takingintoconsiderationin�lationeffects,�iscalconvergencewasnonexistentuntil2019,wheneventsforcedthegovernmenttodoaverylargeadjustmentinanelectionyearwhichfurtherdebaseditssupport.Inshort,itisdif�icultnottopointto�iscalpolicyasthemainresponsibleofthecollapseoftheprogram.Was IT too fast and aggressive? TheanalysisofsectionIIIhelpedusdiscussthisissue.WeshowedthatcountriesimplementedITorapathtoITatin�lationratessimilartothoseofArgentina,andthatthepathofdisin�lationinthiscasewasverymuchinlinewithinternationalexperience.Wealsoshowedthataframeworkwith�loatingrates,wasnotuncommonatthein�lationratesatwhichArgentinastartedandinsomecasesevenacceleratedthedisin�lation.Butwealsopointedoutseveraldrawbacksinimplementation.Utilitypriceadjustmentsinthe3digits,movedin�lationupwardsbyspikeswhichledtocontinuousmissesofthetargetunderminingcredibility,particularlywhenoverallin�lationandnotcorein�lationhadbeenchosen.Therewasnoinstitutionalframeworktocorrectthein�lationtargets,andwhiledisin�lationwassteadymonetarypolicyendedupbeingnotastightasrequired,leadingtodeviations,withtheCentralBankamplifyingthedramaaswayofshowingitscommitmenttodisin�lationwithoutrealizingthatindoingsoitwaserodingitsowncredibility.ApointnottobemissedisthatITregimesinparticular,anddisin�lationingeneral,presupposeindependenceoftheCentralBank,andlackof�iscaldominance.Infact,hadtheCentralBankbeenindependent,theturnaroundinpoliciesandunanchoringofexpectationsfollowing28Dwouldnothaveoccured.HadtheCentralBankbeenindependent,theturmoilofthe�inalmonthsoftheadministrationwouldalsohavebeenavoided,asnobodywouldhavethoughtthatbigchangeswouldbeassociatedtomonetarypolicyasaresultofanelectionoutcome.However,thefailedexperiencesofthesetwodisin�lationsattemptsdonotseemtohaveconvincedthegeneralpublicthatin�lationisamonetaryphenomenon,norhavetheyledtoastrongerbeliefregardingtheneedforanindependentCentralBank.Soonepossibleconclusionwasnotthatthein�lationprogramwasexcessivelyambitious,butthatneitherthe�iscalnortheinstitutionalpreconditionsweremet.Ofcoursethisdoesnotmeanthatanotherdisin�lationprogramwouldhaveperformedbetter.Itsimplystatesthatthosepreconditionsshouldhavebeenaddressedmoreforcefully.Was the change in targets justified? Muchoftheanalysisofthispaperplacedthechangeintargetascenterpieceoftheturnaroundofexpectations.Ofcoursethechangeintargetswasnotanisolatedevent.Itwasimplementedforseveralreasons,�iscalprocrastination,andalsothedesiretoaccelerateeconomicgrowth

40

throughareductionoftheinterestrate.The(negative)signalsitprovidedintermsofthewillingnesstopursue�iscalreform,thereductioninthematuritiesoftheLebacsandforegoinganindependentmonetarypolicybecameadragontheprogramwhichwasimpossibletorevert.Was aiming for a floating rate a mistake? Anissueofmuchdiscussionwaswhethera�loatingexchangeratewasanappropriatechoice,particularlyinacountrywithsuchalonghistoryofin�lationanddollarization.Wediscussedthisfromdifferentperspectives.Ontheonehandweshowedthatothercountries�loatedtheirexchangeratesindisin�lationprocesssimilartothatofArgentina,andweshowedthattheexchangerateplayedalimitedroleinpricedynamics,particularlyduringtheITregimeperiodwhenexpectationsdrovemostoftheprocess.Atthesametime,a�loatingratemayhaveprovidedabufferbothintheperiodofcapitalin�lowsaswellasinthesuddenstop.Whileouranalysissuggeststhena�loatingratemayhavenotbeenanunreasonablechoice,byimplementinga�loatingrate,thegovernmentgaveawaythebene�itsofalargereconomicboomattheoutsetoftheprogram.Ifthisboomwouldhaveprovidedmoreroomimplementingreformsoraccelerating�iscalconvergenceremainsanopenquestion.Beforemovingon,itisworthmentioninganotheradvantageof�lexiblerates:thefactthatthe�lexibilityprovidedbya�loatingrateisnotonlyeconomicbutalsoinstitutional.A�ixedexchangerate,beingagovernmentcommitment,createsasenseofobligationtocompensatelosersifadevaluationoccurs,whichisnotpresentwith�loatingrates.Thus,itismucheasiertoadjusttoshocks“withoutchangingtherulesofthegame”with�loatingratesthanwith�ixedrates.Argentina,wasabletotransitalargesuddenstopin2018withoutfundamentallychangingcontracts,somethingthatmayhelptobuildcon�idenceandreducerisksgoingforward. Was the accumulation of reserves (and Lebacs) excessive? DuringtheprogramtheCentralBankacquiredthedollarsbroughtbythegovernmentto�inanceitsde�icitissuingshorttermCentralBankpapertosterilizethemonetaryeffect.Wasthisamistake?Indoingso,theCentralBank,increasedtheratioofbackingofitsliabilities,butalsoincreasedthetemptationofanin�lationarydilution.Calvo(1988,1991)providesasimplespeci�ication.Inhismodel,government�inancesdebtinlocalcurrency.Intheabsenceofprecommitmentthemarketchoosestheinterestrateandthegovernmentdecideswhethertodefaultornotonthedebt.Hismainideaisthattherearemultipleequilibria,dependingonhowthegovernmentinternalizescostsandbene�itsfordefault.Atlowinterestratesthecostofservicingthedebtislowandtheuniqueequilibriumisnodefault.Atveryhighrates,taxesrequiredtoservicethedatearelargerandthegovernmentmay�indanincentivetodefault.During2018severaldevelopmentsincreasedthepossibilityofthebadequilibrium.Ontheonehand,thesizeofreservesanddebthadincreased,ontheother,the28Dhadsignalledthatthegovernmentassignedalowercosttoin�lationthanpreviouslyexpected.Thisimpliedthattheequilibriumdefaultratebecomeslargerandtheprivatesectorwouldaskforahigherrateex-ante.

41

Hence,anincreaseintheinterestrate,inthiscontext,couldbeinterpretedasasignalthatthegovernmentwoulddefault.Inthatsensetheinitialincreaseintheinterestrateto40%(andthesubsequentincreases)wasadouble-edgedsword.Ontheonehanditwasnecessarytoreducetherequiredsalesofreserves,butsimultaneouslygeneratedlargeruncertaintiesaboutthefuture.Isthisenoughtoconcludethattheprocessofreserveaccumulationwastolargeorinconvenient?Thisremainsanopenquestion.Sturzenegger(2019)arguesthatArgentinastartedwithreserveslevelsubstantiallybelowthoseofcomparablecountries.Thereserveaccumulationreducedvulnerabilitiesandreducedtheexchangerateappreciation,butconditionedthein�lationobjective.Notinterveningwouldhaveallowedforafasterdisin�lation,attheexpenseofalargerappreciationandmorevulnerabilities.Withnointerventionthegovernmentwouldhavefoundalimittoitsindebtednessearlyon,thismayhavepushedforfaster�iscalconsolidationandthroughthatchannelmayhaveprovidedabetteroutcome.While,itisdif�iculttoassesstherelativebene�itsandcosts,itappearsthatnotpurchasingthereserveswouldincreasedvulnerabilitiesanddeliveredaworseoutcome.Was the financing structure of fiscal deficits correct? Akeyfactorinunderstandingthevulnerabilitiesrelatetothefactthatthe�inancingofthede�icitwasdonewithshorttermexternaldebt,whichledtosubstantialvulnerabilities:alargerrealexchangerateappreciation,abiggercurrentaccountde�icit,andacurrencymismatchincaseofarealexchangeratedepreciation.WhiletheCentralBanktriedtoreducethecurrencymismatchbyaccumulatingdollars,therequesttohavetheCentralBankreducethematurityoftheitsowndebtconstitutedaseriousmistake,thusabruptlyincreasingrolloverrisks. Was the reaction to the sudden stop the adequate one? Oncefacedwiththesuddenstop,theissueiswhatisthebestwaytodealwithit(seeCavallo,2019forarecentreview).Table5showshowcountriesperforminasuddenstop.Thedependentvariableisthechangeinoutputchangeandtheexplanatoryvariablesareworldgrowth,termsoftradeshocks,interestrates,opennessandtheexchangerateregime .Theresultsherearealsopredictable.Floatingrates,andlowerinterest43

rates,providethebestrecipefordealingwiththesuddenstop, inlinewithOrtiz44

etal(2009)whostudy“systemicsuddenstops”,(i.e.thosenotrelatedtoshocksinindividualcountries),showingthattheabilityofimplementingcountercyclical�iscalandmonetarypolicyintheeventimprovetheoutputperformance.HowdotheseresultshelptounderstandArgentina'sexperience?Oncethesuddenstopstarted,theCentralBankinitiallydidnotallowtheexchangeratetofully�loatandincreasedsharplytheinterestrate.Aftertwoyearsof�iscalprocrastinationandwithpricesunanchoredduetotheannouncementof28D,thepolicyresponsewassuboptimal.The�irstIMFprogramwasthoughttoprovideroomforabetterresponse:toavoidanexcessivelyprocyclical�iscalpolicyandtorecovercredibility

43SeeGuidottietal(2004).44ForananalysisofeffectsoftheexchangeratepolicyseeLevyYeyati(2019),foranalysisSuddenStopsdynamicsseeCalvo(1998).

42

asawayofallowingtheexchangeratetodoitsjob,withoutrelyingsoheavilyontheinterestrate.Butthe�irstIMFprogramfailedtodeliverthischangeofexpectations.In2019�iscalpolicybecameverycontractionary,andwhileitseffectsweresomewhatmutedbythe�loatingexchangerate,theeconomycouldnotrecover.

Table5.EffectsofSuddenStops

Finally,were the poor results derived from history, self made mistakes, external factors or just bad luck? Whilethemacroeconomicheritagereceivedbythegovernmentwasnotideal,itisdif�iculttoblametheresultsonthem.Thestartoftheprogramwasrelativelysuccessfulandtheeconomygrewhealthilyinthe�irsttwoyears.Infact,bytheendofthesecondyearexpectationsofgrowthwassolidat3%peryearfortheremainingtwoyears.Luckplayeditsrole,butprimarilywithalargedroughtthatshaved2%ofGDPinearly2018,whichinturncoincidedwithatighteningofexternalconditionsduetotheinterestratehikesassociatedtothereversalofQEpoliciesintheUS.Butthisshockaffectedmanycountrieswithoutthesameconsequences.Thus,itisdif�iculttoassociatetheperformancetoluckorexternalconditions.Attheendtheblameresidesinthepoliciesthatweredecided.Fiscalpolicydeteriorationinthe�irstplaceandthen,thechoiceofbettingonmoreshortrungrowth,evenattheexpenseofmonetaryinstitutionsandin�lation.Weakeningthe

43

�ightagainstin�lation,appearstohavebeenacostlyandobviouspoliticalmistakeinacountrythatrewardsinthepollsachievingstabilization,amistakethatappearsparadoxicalforateamthathadshowedsigni�icantprofessionalisminitsevaluationofpoliticalrisksandbene�itsandhadseenthepoliticalbene�itsofdisin�lationinthemidtermelectionsof2017.Atanyrate,alltheexperienceseemstosuggestthatinstitutionalbuild-upisanessentialprerequisiteofasuccessfulstabilizationandgrowthprocess.EveninthislessonArgentinaisconventional. Appendix 1. The holdouts problem Argentinain2016wasalsoaboutto�inalizeitslongzagaofdebtdefaults.Argentinahadranintodebtproblemsin2001,astheresultofalongrecessionthathadstartedin1998.Anattempttoextendmaturitiesatmarketratesbymid2001wasnotenoughtocalmthemarkets.Sothegovernmentimplementedanaggressiverestructuringofdomesticdebtattheendof2001,withhaircutsbetween40and60%,butshortlyafterdeclaredadefaultonexternaldebt.Theresultwastackledin2005withagainanaggressivedebtrestructuring(haircutsonsomebondsrunningashighas88%) .Thisinitialrestructuring,harshasitwas,45

wasabletoenticeabout76.1%participation.However,giventhatthebondsdidnothavecollectiveactionclausesanumberofholdoutsremained.Overtheyearstheseholdoutsattemptedtoattachseveralassets,alwaysunsuccessfully(themostbizarreattemptwastheattachmentofamilitaryschoolship(Fragata Libertad )foracoupleofweeksintheportofTemainGhanabeforeitwasreleased).In2010,thegovernmentissuedasecondcallforparticipation,inthesametermsoftheoriginaldealthoughforfeitingsomepaymentsmadesincethen.Thissecondattempthadreasonablesuccessbringingparticipationintherestructuringdealto92.4%.However,thelawthatallowedthissecondcallalsoforbidanyfuturedealtoanybondholderthatdecidednottoparticipate(thesocalled“lock law ”) .46

UptothatpointJudgeGriesa,fromthe2ndCircuitNY,inchargeofthecase,hadsomewhatprocrastinated,allowingArgentinatimetomakeareasonableoffertobondholdersatlargeandholdoutsinparticular.Oncethisseconddealhadbeencompleted,itsummonedArgentineauthoritiesaskingthemtoputforwardaproposalforremainingholdouts.Atthatpointtheauthoritiessaidthatthelawprecludedthemofmakinganyoffer,andthatnopaymentwouldbeforthcomingregardlessofthedispositionofthecourt.Thereactionofthecourtwastoissuearulingarguingthatthe“lock law ”violatedthepari passu clausecontainedinthedefaultedbonds.Accordingtothejudge,the“lock law ”violatedthepari passuclause,whichisde�inedastheobligationtoallowanybondholdertoparticipatein

45FortheresultsanddetailsofbothrestructuringsseeSturzeneggerandZettelmeyer(2006,2007,2008)aswellasCrucesandTrebesch(2013). 46ThegovernmentarguedthatitcouldnotmakeanydealwithholdoutsbecausebondholdersthathadparticipatedintheexchangeshadtherighttoaRUFOclause(RightsUponFutureOffers),thusimpedingabettermentofoptionstoremainingholdout.Atanyratetheseclauseshadanexpirationdateon12/31/2014.

44

arestructuring.Itruledthat,asaresult,nopaymentcouldbedonetoanyotherbondholder,unlesspaymentswerenotdonepro-ratatoholdoutcreditors.Argentinatriedtocoercebankstostillpaytorestructuredbondholders,butbanksdeclined,soArgentinafellagainindefaultwithrestructuredbondholders.Thiswasthestateofaffairswhenthegovernmentassumed.ThegovernmentneededtonormalizethesituationbyofferingareasonablesolutionthatwouldbeacceptabletotheJudge.Argentinaofferedapaymentof150%ofthecapitalatstakeor75%ofthelitigationruling(incasethebondholderhadasettlementamount).Somefundshadlitigatedandobtainedrulingsearlyon.Afterruling,settlementobligationsamountswhereadjustedatarateassociatedtoUSrates.Thusforthesefunds,the150%offerrepresentedmorethantheiractualrulingobligationbroughtupto2016.ThesefundsimmediatelyacceptedArgentina´sgenerousoffer(infactArgentinawasofferingmorethantheywerelegallyentitledto).Butothermoresavvyparticipantshadtakenanotherroute,usingsomepeculiarbondsthatArgentinahadissuedin1998.AmongthemthemostprominentwastheFRAN,thatwasissuedpayingareturnequivalenttoArgentina´scountryrisk.AsArgentinaplungedintodefaultinearly2002,thesebondsstartedpayingtheimplicityieldondefaultedbonds,athreedigitinterestrate.Thisratecontinuedtoaccruewhilebondholdersdidnothavearuling,actuallyevenbeyondtheactualoriginalexpirationdateofthebond.NML,forexample,litigatedonasmallshareofitsholdingsandhadobtainedarulingwhichwantedappliedtotheirwholeholdings.FortheFRANholdertheclaimwasveryhigh,insomecasesreaching20timestheoriginalcapital .Forthesebondholders,theofferof150%noteven47

closelymettheirclaims.Thus,holdoutspushedforwardandattemptedanegotiationtoimproveonthisnumber,butthismetstiffresistancefromthejudge’snegotiatorDanPollack,whoconsideredthatArgentina'sofferwasatthispointmorethanreasonable .Withthesupportofthecourt’snegotiator48

Argentina’sproposalwasaccepted.Atanyratethe300millionoriginalissueofFRANbonds,endeduprepresentingaliabilityofclosetoUSD6billion.TheoverallpaymentwasUSD9.3bn,whichwasmadetothecreditorscash,and�inancedwiththeissueofamarketbond.Atanyrate,afterthemanyyearsthatArgentinahadlivedunderthespectreofthisdefault,theresolutionofthisdefaultwasconsideredasecondbigsuccessofthegovernment.Appendix 2. VECM Estimation

TheTable4displaystheresultingestimatesofthecointegratingequationsderivedfromastandardVectorErrorCorrectionModel(VECM),basedontheinteraction

47Adetailedcomputationcanbe�indat:https://www.bloomberg.com/opinion/articles/2016-02-08/argentina-s-bond-�ight-comes-down-to-its-worst-bonds.48Itissaidthatupononehearing,theholdoutsbroughtadocumentexplainingwhattheywereowed,andPollackbrowsedthroughitandwithasmilesaid“thisiswherethisisgoing”andthrewitintothegarbagebin.

45

betweenprices(Prices ),exchangerate(FX ),regulatedprices(Reg )andin�lationexpectations(Exp ).Thegeneralspeci�icationappliedistheusual:

Inthisspeci�ication, isthevectoroffourvariablesmentionedabove,whileyt Γistandforthecoef�icientsassociatedwiththelaggeddifferentiatedvariables(thematrix ).Theterm representstheso-called“ErrorCorrectionTerm”,X t 1− β y α ′

t 1− whichdescribesthelong-runrelationshipamongthecointegratedvariablesandthespeedofadjustmenttoit.Morespeci�ically,theTable4showsthecoef�icientscorrespondingtothelong-runcointegratingequation( ),fordifferenttime β′ periodsandvariablesincluded.

Thedatausedhasweeklyfrequency.Thesourcesofdataarethefollowing:Prices isderivedfromthePricestatsIndex,Reg comesfromtheweeklyseriesoftheconsulting�irmElypsis,FX isobtainedfromtheBCRA’sCom.A3500,andExp fromtheBCRA’sMarketExpectationsSurvey(REM).ForExp ,twodifferentvariableswerealternativelyincluded:1)one-month-aheadexpectations,and2)12-months-aheadexpectations,andtheirlevelswerecomputedbasingontheactualleveloftheCPIineachmoment.Allthevariableswereincludedasthenaturallogarithmoftheirlevels.

ThestationarityoftheserieswasexaminedbyADFtests.Weveri�iedthatallofthemareclearlyI(1),exceptfortheexpectations,inwhichcasethereissomeevidencepointingtothefactthattheymaybeI(2).Thisproblemcouldpossiblyarisefromthesmallsizeofthesampleunderanalysis,whichmakesitimpossibletocarryoutacomprehensivestudyoftheseriesandalsodiminishesthepowerofthetests.ThecointegratingrelationshipsweretestedbystandardJohansenTests,whiletheabsenceofautocorrelationwastestedbyLMtestsandtheabsenceofHeteroskedasticitybyWhite’stests.Theoptimallagstructurefortheshort-runcoef�icientswasselectedbyoptimizingtheAkaikeInformationCriterion(AIC),andafterwardsexcludingthenon-signi�icantlagsaccordingtoWaldtests(thesigni�icanceofeachlagwastestedjointlyforallvariablesateachmomentoftimet ).

Thefollowingtableshowstheothercoef�icientsoftheequationcorrespondingtoPrices withintheVECM,i.e.,theadjustmentcoef�icient( )andthecoef�icientsα associatedwiththeshort-runeffectsestimatedbythemodel:

TableA1.VECMmodelforin�lationinArgentina.Short-runcoef�icients.

46

Additionally,withtheaimofassessingthejointsigni�icanceofthelagsassociatedwitheachvariableasagroup,blockexogeneityWaldtestswereperformedforeachvariableineachspeci�ication(TableA2). TableA2.BlockExogeneityWaldTests.Jointsigni�icanceofshort-runcoef�icients.

Fromtheresultingestimatescanbederivedthatin�lationexpectationsappeartobesigni�icant(inblock)toexplaintheshort-runevolutionofPricesinalmosteveryspeci�ication(12-month-aheadexpectationsaresigni�icantinalltheregressions).

47

ItisworthnotingthatalltheresultsreportedarerobusttochangesintheorderofvariablesfortheCholeskyfactorization.Neitherthevariancedecompositionsnorthevaluesofthecoef�icientsexperiencesigni�icantmodi�ications.Appendix 3. Cyclically and inflation-adjusted primary fiscal balance Twotechnicaladjustmentsweremadetotheprimary�iscalbalancereportedbytheMinistryofFinance.The�irstwasarelativelystandardcyclicaladjustment,totakeaccountoftheeffectsonthe�iscalresultderivedfromtheGDPcycles.Thesecondwasamorecountry-speci�icadjustmentforthecaseofArgentina,toconsidertheimpactthataccelerationsordecelerationsofin�lationproduceonthegovernmentspendingdevotedtopensionsandsocialtransfers.TheresultsareshowninFigure7.Forthecyclicaladjustment,themethodologyappliedfollowsEscolano(2010).First,basedontheseasonally-adjustedseriesofrealGDP( )publishedbyINDEC,y thepotentialGDP( )wascomputedbyaHodrick-Prescott�ilter.Theoutputgap(y γ)isde�inedas:

γ = yy y−

Afterthat,realserieswereconvertedtonominalseries( and ,respectively)Y Y applyingthecorrespondingGDPde�lator.Fiscalrevenues( )andexpenditures(R)werecorrectedbyapplyingthefollowingequations:G

(1 )R* = R + γ μ− (1 )G* = G + γ κ−

AsmentionedinEscolano(2010),theinternationalevidencefoundthat,inpractice,theelasticityofrevenues( )istypicallyslightlyabove,butcloseto,1.μ Also,theelasticityofexpenditure( )isestimatednearzeroformanycountries.κ Thelatteristhecasebecause,byde�inition, shouldre�lectonlythe�iscalκ automaticstabilizersfromtheexpenditureperspective(e.g.,unemploymentinsurance),whicharetypicallyasmallfractionofspending(asithappensinArgentina),andshouldnotre�lectdiscretionaryactions,evenifthesearemotivatedbycyclicaldevelopments.Hence, =0wasused.Buttocomputemorepreciselytheresponseofgovernmentκ incometoGDPcycle,theelasticityoftaxrevenueswasestimatedseparatelyfromtheelasticityofsocialandemploymentcontributions.UsingdatapublishedbyAFIPforthedifferenttypesofrevenuesandfromINDECfornominalGDP(from2010to2018),aregressionofthisformwascomputedinordertoestimatethedifferentelasticities:

nX μ lnY onstantl = + c

48

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