The stability of the demand for broad money in Argentina in the post-financial liberalization period

Jovis Wolfe Bellot, Fordham University

Abstract

This study examines the stability of money demand in Argentina before and after the 1991 financial reform and convertibility program. Unlike a number of previous studies, we find empirical evidence that the Convertibility Plan of April 1991 led to a positive shift in money demand in Argentina. This result is particularly interesting in that Argentina not only fixed its exchange rate to bring down inflation but it also liberalized its financial system by removing capital controls and legalized dollar deposits. These reforms created a strong rightward shift in the money demand function, but because dollar deposits were legalized and inflation fell, seignorage revenues decreased despite the increase in money demand. The structural break in money demand is confirmed by a variety of tests for coefficient stability including the recursive residual test, the recursive coefficient test, and the CUSUM test. These results suggest that mix of financial liberalization, and fixing the exchange rate were very successful in remonetizing the banking system and in reducing inflation, but the switch to dollar deposits eliminated much of the seignorage windfall governments often enjoy following successful exchange rate based stabilizations. This meant fiscal deficits had to be financed largely by foreign borrowing, contributing to the build up of external debt that created debt service difficulties in the late 1990s. ^

Subject Area

Economics, General|Economics, Finance

Recommended Citation

Jovis Wolfe Bellot, "The stability of the demand for broad money in Argentina in the post-financial liberalization period" (January 1, 2002). ETD Collection for Fordham University. Paper AAI3037210.
http://fordham.bepress.com/dissertations/AAI3037210

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