Country Risk and the Mundell-Fleming Model Applied to the 1999–2000 Argentine Experience

Abstract

In this paper we propose a modification of the traditional Mundell-Fleming model. The extended model introduces the implications of including the fiscal deficit and international reserves as determinants of the level of country risk. This slight modification of the traditional paradigm leads to radical changes in the effects that fiscal and monetary policies have in economies with high capital mobility under an extreme version of a fixed exchange rate regime (Currency Board). We use the proposed model to evaluate some of the economic policies implemented between December 1999 and March 2001 by the first economic team under the Presidency of Fernando De la Rúa in Argentina. Additionally, we suggest that some of the main results obtained from the model are applicable to other emerging economies. JEL classification code: F41