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Appendix I Argentina's Potential Output Growth

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Appendix I Argentina's Potential Output Growth Appendix I Argentina’s Potential Output Growth s a result of Argentina’s strong growth perfor- A mance following the stabilization at the begin- Figure 14. Potential Output and Output Gap ning of the 1990s, and its recovery from the Tequila crisis, by mid-decade it was commonly assumed that Argentina’s potential output growth was in the range 130 !/2 Real GDP and Hodrick-Prescott Trend of 4 to 5 percent per year. At least in retrospect, Estimate1 however, there are reasons to believe that this repre- 125 A: HP filter sented a significant overestimate of potential output 1993–1999 growth. 120 Potential output growth is the growth rate of the economy at which, in the absence of monetary im- 115 pulses, there should be no inflationary pressures. 110 Conceptually, potential output growth need not be B: HP filter 1993–2000 constant. Indeed, to the extent that Argentina’s struc- 105 tural reforms (including deregulation, privatization, and labor market reforms) in the early part of the 100 decade gave a boost to the level of potential output, 95 potential output growth would surge initially but 1993 95 97 99 2001 then return toward its longer-run rate—especially as 20 structural reforms began to fizzle and in, some in- 9 Output Gap, Consumer Prices, stances, to be reversed. Unemployment Rate2 18 Unemployment rate One approach to estimating potential output (right scale) growth is to fit a smoothing filter to actual real GDP. 4 16 This allows for some variation in the growth rate of 14 potential output. Given the structural changes of the –1 12 economy, however, the key question concerns the pe- 10 riod over which the filter should be applied. Quar- Consumer price index terly (seasonally adjusted) national accounts data are –6 (net of import prices) 8 available from 1993, and given that growth in 6 1991–92 was probably driven by a rebound from the –11 Output gap 4 collapse during the hyperinflation, 1993 provides a convenient starting point. More tricky is the choice 2 0 of the end-point. Figure 14 shows two possible –16 1995 96 97 98 99 2000 01 choices, ending the sample period in 1999:Q4 (la- beled A) or 2000:Q4 (labeled B); beyond these ter- 1A Hodrick-Prescott filter is applied to the period minal dates, potential output growth is extrapolated 1993:1–1999:4 (Trend A) or 1993:1–2000:4 (Trend B); potential 44 output thereafter is extrapolated using the last quarter’s growth using the final quarter’s growth rate. rate. 2Output gap implied by Trend A; positive output gap indicates 44By 2001, the economy is clearly in collapse and including actual output above estimated potential output. 2001 in the estimation sample leads to a downward bias of poten- tial output over the entire period. 46 ©International Monetary Fund. Not for Redistribution Appendix I Using Trend A, output was on average 2 percent 1998 (only semi-annual data are available) and above potential in 1997 and, on average, almost 3!/2 started increasing thereafter. The evidence thus sug- percent above potential in 1998. The growth slow- gests that, while output was above potential in the down brought the economy to 2!/2 percent below po- first part of 1998, by end-1998 and early 1999, a tential in 1999, 5!/2 percent below potential by 2000, clear output gap was emerging—consistent with and almost 12 percent below potential by 2001. Trend A, but not with Trend B. Using Trend B, output was almost 4!/2 percent above According to Trend A, potential growth decreased potential in 1998, close to its natural level in 1999, from 3!/2 percent per year during 1993–97 to 3 per- 2!/2 percent below potential in 2000, and 7!/2 percent cent by 1998 and 2!/2 percent thereafter. For the pe- below potential in 2001. The deceleration in poten- riod 1993–2001, potential output growth averaged 3 tial output growth in 1999–2000 implied by trend B percent per year—well below the 4!/2 to 5 percent po- seems implausibly large, and the small output gaps tential output growth underlying medium-term debt inconsistent with the behavior of other macroeco- sustainability projections. This may also be com- nomic data. For instance, consumer prices, purged of pared to Argentina’s fitted growth rate implied by the the effect of import prices, were increasing through cross-country growth regression reported in Box 8 of the first half 1998, but began to decline in the fourth the text, which also yields an average growth rate of quarter of the year and continue to fall through 2001 3.0 percent per year when the effects of deflation are (see Figure 14, bottom panel).45 Likewise, unemploy- excluded.46 ment reached its lowest level in the second half of 46The model estimated for Box 8 includes a term to capture low 45The figure shows the residual from an OLS regression of the or negative inflation, on grounds that deflation may lower aggre- logarithm of the consumer price index regressed on the logarithm gate demand. This term is excluded here, since deflation is likely of the import price index. to affect aggregate demand but not potential output. 47 ©International Monetary Fund. Not for Redistribution Appendix II Chronology of Key Developments in 2001–2002 2001 Jan. 12 IMF approves augmentation of Argentina’s a face value of $29.5 billion are voluntarily Stand-By Arrangement to $14 billion and exchanged for longer-term instruments. completes second review. June 15 Economy Minister Cavallo announces Mar. 2–3 Economy Minister Josehuis Machinea re- package of tax and trade measures, includ- signs. Ricardo Lopez-Murphy is appointed ing a trade compensation mechanism Minister of Economy. for exporters and importers of non- energy goods. Mar.16 Economy Minister Lopez-Murphy announces plan of budget cuts to meet fiscal targets July 10 Government pays yield of 14.1 percent to agreed with the IMF. place $827 million of 90-day paper. July 11 Economy Minister Cavallo announces dras- Mar. 19–20 Economy Minister Lopez-Murphy resigns. tic program of fiscal adjustment aimed at Domingo Cavallo is appointed Minister eliminating the federal government deficit of Economy. from August 2001 onwards (the “zero- Mar. 26–28 Risk rating agencies lower Argentina’s deficit plan”). long-term sovereign rating (S&P from BB July Risk rating agencies lower Argentina’s long- to B+ and Moody’s from B1 to B2). term sovereign rating further (S&P from B to B– and Moody’s first from B2 to B3 and Mar. 28 Economy Minister Cavallo secures “emer- then from B3 to Caa1). gency powers” from Congress. Announces economic program comprising a tax on July 30 Senate approves the zero-deficit plan bank transactions, changes in other taxes (lower house of Congress had approved it and tariffs, and sectoral “competitiveness on July 20). plans.” Aug. 21 IMF announces likely $8 billion augmenta- April Central bank reduces liquidity require- tion of Argentina’s Stand-By Arrangement ments and allows banks to include govern- credit. ment securities up to 2 billion pesos among liquidity requirements. Sept. 7 IMF approves augmentation of stand-by credit to about $21.6 billion and completes April 16 Minister Cavallo sends to Congress a bill Fourth Review. to include the euro in addition to the Sept. 20 The Central Bank activates the contingent U.S. dollar in the Convertibility Law. repo facility with international banks, April 23 Authorities suspend scheduled auction of boosting gross reserves by about government bonds. $1.2 billion ($500 million was disbursed in October). April 26 Roque Maccarone replaces Pedro Pou as Oct. 9–12 Risk rating agencies lower Argentina’s President of the Central Bank. long-term sovereign rating further (S&P – May 8 Standard & Poor’s lowers Argentina’s from B to CCC and Moody’s from Caa1 long-term sovereign rating further from to Caa3). B+ to B. Oct. 14 Ruling coalition obtains less than 25 per- cent of the votes in mid-term congres- May 21 IMF completes third review of Argentina’s sional elections. Stand-By Arrangement, reprofiling the path for the federal government deficit target Oct. 28 Economy Minister Cavallo announces that during 2001 to accommodate the devia- he will seek a “voluntary” restructuring of tions observed during the first quarter. all the government debt. June 3 Authorities announce the completion of Oct. 30 Standard & Poor’s lowers Argentina’s long- the “mega-swap.” Government bonds with term sovereign rating from CCC to CC. 48 ©International Monetary Fund. Not for Redistribution Appendix II Nov. 1 The authorities announce a new fiscal transactions, including a weekly 250 pesos package, including a new batch of competi- cash withdrawal limit on sight accounts. tiveness plans, the rebate of VAT payments on debit card transactions, a temporary re- Dec.10 The central bank imposes a 98 percent duction in employee social security contri- reserve requirement on deposit increases butions, a corporate debt restructuring after December 1, 2001, aimed at limiting scheme, and a tax amnesty that writes off flight to quality within the system. interest and penalty obligations accrued to end-September 2001. Dec. 13 Phase one of the government debt exchange is completed. Nov. 6 Standard & Poor’s lowers Argentina’s long- term sovereign rating from CC to SD Dec. 19 State of emergency is declared to stop (selective default). protests against Economic Minister Cav- allo’s economic policies.The lower house Nov. 23 The central bank introduces an effective cap of Congress repeals the special legislative on bank deposits, by imposing a 100 percent powers granted to Cavallo.
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