The impact of the Argentine crisis on selected emerging market currencies / J. Marais

Recent years have witnessed an increase in currency crises that affected a largenumber of emerging and developed countries, either directly or indirectly. A number ofrecent financial crises, including the Argentine currency crisis, have been accompaniedby episodes of financial market contagion and speculative attacks. The emergingmarket financial and currency crises of the second half of 1990s have changed manyeconomists' viewpoints with regard to exchange rate policies.A country's exchange rate system provides an important foundation for theimplementation of other economic policy measures. Many economists and authoritiesbelieve that most emerging markets should either adopt a free-floating or super-fixedexchange rate regime in order to prevent the recurrence of financial or currency crises.Pure floating and fixed exchange rate regimes are only two of the possible exchangerate regimes that a country can choose to adopt. Neither pure floating nor fixedexchange rate regimes solve all the problems arising from modern globalised financialmarkets. Recent episodes of currency and financial crises have led to the costs andbenefits of alternative exchange rate regimes being reconsidered. In choosing the rightexchange rate regime for each country, one should take into consideration the size anddegree of openness of the economy, the level of inflation, the degree of price and wageflexibility, financial development, credibility of policy makers and capital mobility.Argentina outperformed most other economies in the region until the massive collapseof the Argentine economy and the abandonment of the currency board early in 2002.Currency crises in emerging markets are often different in nature from those in matureand developed markets. Both currency crises in emerging markets and those indeveloped markets have triggered a variety of theories regarding the causes ofspeculative attacks.In this dissertation, an empirical analysis was performed with the aim of identifyingspeculative attacks and contagion on selected emerging and developed markets,occurring specifically during the period of the Argentine currency crisis. Countries thatoperated with free-floating exchange rate regimes during the Argentine currency crisiswere more affected than those countries operating with fixed exchange rate regimes. Italso became apparent that speculative attacks and contagion tended to be regional andoccurred in emerging markets in the southern hemisphere.