Argentina From Default to Default: Argentina’s financial crisis of 2001 and the recent “technical” default of 2014 - Are capital controls effective?

Stephan Hans Schäfer

Student thesis: Master thesis


Argentina’s economy has been afflicted by periods of upheaval, hyperinflation, and currency instability. In 1991, to get hyperinflation under control the Argentine government implemented a quasi-currency board, better known as the Convertibility Plan. The Convertibility Plan fixed the peso to the U.S. dollar at a constant rate. As a consequence, inflation decreased tremendously in Argentina. After some time of economic prosperity, the current account turned into a large deficit due to spillover effects from other crises, a high federal budget deficit, and an overvalued exchange rate. As a result, end of 2001 Argentina declared its sovereign default and the country experienced one of its worst financial crises. Consequently, the Convertibility Plan had to be abandoned and the peso had to be devaluated. On the one hand, after the financial crisis of 2001 and the associated implementation of strict capital controls, the Argentine economy grew significantly until 2014. On the other hand, recently Argentina defaulted a second time on its debt of 2001 just within 13 years. Thus, this study examines the effectiveness of Argentina’s capital controls in terms of how successful they achieved their intended policy objectives until the second default in 2014. Additionally, this study looks at the microeconomic costs associated with the capital controls. The study identifies four main policy objectives that the Argentine government pursued with the implementation of capital controls. These objectives were to maintain a certain degree of monetary and exchange rate policy, to prevent international foreign reserves from exhaustion, to reduce fluctuations in short-term capital inflows and to contribute to a stable economy. An extensive macroeconomic analysis is carried out to examine the effectiveness of the capital controls. The preliminary results of the research show that the government did not achieve autonomy of monetary and exchange rate policy with the implementation of capital controls. International foreign reserves could not be stopped from falling either. However, there is some evidence that capital controls reduced the inflow of short-term speculative investments and that capital controls contributed to economic stability to some extent, even though inflation remained high. Given that two policy objectives, including the most important one to prevent international reserves from falling, were not achieved, the overall effectiveness of the Argentine capital controls to accomplish their main policy objectives was quite low. Moreover, the Argentine capital controls were associated with substantial administrative and microeconomic costs. Taking these costs into consideration, the study concludes that the overall effectiveness of the Argentine capital controls to accomplish their intended policy objectives was quite low.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2015
Number of pages91