Making explosive cocktails : Recipes and costs of 20 Argentine crises from 1865 to 2004

The objective of this paper is twofold. Firstly, we investigate what were the “recipes” of the 20 Argentine currency crises from 1865 to 2004 using regression tree analysis, which is a non-parametric data classification technique. Secondly, we evaluate the costs of Argentina’s crises in terms of output losses and recovery time. We obtained three “recipes” that constitute an early warning system. The most costly and frequent mix has two “ingredients”: high Public Expenditures (% of GDP) and Current Account Deficit (% of GDP). The less frequent and less costly mix consists of moderate Public Expenditures, Real Exchange Rate Overvaluation, and high International Interest Rates. Finally, the mix with intermediate costs and medium frequency is made up of five ingredients: moderate Public Expenditures, Real Exchange Rate Overvaluation, moderate International Interest Rates, strong decline in Bank Deposits, and high ratio of Monetary Aggregate M2 to International Reserves