External Shocks versus Domestic Policies in Emerging Markets

RePEc Short ID: pko790
ORCID iD: 0000-0001-8464-2470

Espino, Emilio; Kozlowski, Julian; Martin, Fernando M.; Sanchez, Juan M.

doi:10.20955/r.105.108-121

Journal Article

External Shocks versus Domestic Policies in Emerging Markets

Abstract: Debt crises in emerging markets have been linked to large fiscal deficits, high inflation rates, and large devaluations. This article studies a sovereign default model with domestic fiscal and monetary policies to understand Argentina's experience during the 2000s commodity boom (2005–2017), following the default of 2001. The model suggests that domestic policies played a critical role in Argentina's poor economic performance. Despite exceptionally favorable terms of trade, a rise in government spending led to higher taxation, inflation and currency depreciation, and lower output. Economic performance would have been worse had Argentina followed a strict, rather than accommodative, monetary policy without curbing its expansionary fiscal policy. Finally, limited access to international credit markets during this episode did not appear to play a significant role.

Keywords: debt crises; emerging markets; fiscal deficits; inflation; sovereign default; fiscal policy; monetary policy; Argentina; taxation; currency depreciation;

JEL Classification: E52; E62; F34; F41; G15;

https://doi.org/10.20955/r.105.108-121