CASE STUDY by Fernando Alvarez and Stephen P. Zeldes
Reducing Inflation in Argentina:
Mission Impossible?
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CASE STUDY by Fernando Alvarez and Stephen P. Zeldes
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Listen
to "Mission
Impossible" Soundtrack Economics Minister Domingo Cavallo sat in his office on March 12, 1991 pondering the fate if his country. High Inflation had been rampant on Argentina for the last fifteen years. In January, 1977, a factory worker living in Buenos Aires could have purchased a container of milk at a local supermarket for 1 peso. Returning to the supermarket fourteen years later, the worker would now have to pay over 1 billion pesos for a similar container. That is, if the currency were still the peso. The unit of currency in Argentina changed twice during the period, and in early 1991 it was the "austral." Of course, it was not just the price of milk that rose so dramatically. Since 1977, the Consumer Price Index had risen at an average annual rate of 333% per year. There was a twelve month period ending in 1990 during which actual inflation was 20,266%. Cavallo knew it was his job to stop this madness. Carlos Menem, Argentina's president, had recently appointed Cavallo to resurrect the economy from "stag-hyperinflation," a punishing combination of recession and inflation. Menem had instituted numerous economic plans in the twenty months since taking office, but had not controlled inflation. To many, it seemed almost inconceivable that Cavallo would succeed at his mission. Was his proposed plan better than the ones tried before? Students are asked to analyze whether Cavallo’s proposed stabilization plan would likely succeed, and whether it should contain a controversial proposal for a "currency board". Students use an included data set (containing the relevant economic variables for Argentina) and answer a comprehensive set of exercises. The case and the exercises are designed to help students learn about the relationships between inflation, exchange rates, money creation, and government budget deficits, and the key policies that can account for the success or failure of stabilization plans. ©2001 by Fernando Alvarez and Stephen P. Zeldes. All rights reserved.
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