The Argentinean Currency Crisis: A Markov-Switching Model Estimation

Abstract

Despite the fact that Argentina has been suffering from a recession for years, the timing and severity of the recent currency crisis surprised most observers. This paper analyzes the role of fundamentals and self-fulfilling speculation in the Argentinean crisis. Arguing within a theoretical model of a fixed exchange rate system that allows for multiple equilibria, we show that the crisis, while being associated with weak and deteriorating fundamentals, cannot be explained by these macroeconomic factors alone. Estimating a univariate Markovswitching model, this paper shows that shifts in agents' beliefs did indeed also play a crucial role.