National exchange rate policies and international debt crises
how Brazil did not follow Argentina into a default in 2001-2002
This paper examines how exchange rate policies and IMF Stand-By Arrangements affect debt crises using econometrics and a comparison between Argentina and Brazil. It refines an existing diagram outlining crisis development to propose crisis prevention strategies. Flexible exchange rate policies reduce a country’s probability of default by over 4%, but Stand-By Arrangements increase it by an inconsequential percentage. Unlike Argentina, Brazil avoided a default via a freely-floating exchange rate system, fiscal deficit reduction, and a cooperative and coordinated relationship with the IMF. The results provide policymakers from developing countries with lessons to manage their countries’ default risks more effectively.
JEL Classification: B23, C12, C23, E44, E61, F34.
Keywords: exchange rate policies IMF Stand-By Arrangements probability of default