Essays on international economics: The tequila and caipirinha effects (Argentina, Brazil)

The first chapter investigates the role of solvency and liquidity during the Argentine banking panic of 1995. On the aggregate level we find that the bank panic originated not only because of the perceived weakness of the aggregate banking sector but also because of doubts about Central Bank's commitment to defend the currency board. On the individual bank level, cross-sectional comparison of failing against non-failing private banks suggests that although banks which were more liquid and better capitalized were more likely to survive a given level of deposit withdrawals, it is not possible to rule out that some banks might have failed as result of a speculative run on their deposits not warranted by fundamentals.; The second chapter studies the role of the banking system as an amplification mechanism during the Argentine banking crisis of 1995 by means of an inter(temporal small open economy model which features costly banking, a non-trivial bank vs. bond financing decision on the part firms and firm heterogeneity. Theoretically, we find that temporary exogenous shocks to world interest rates, to the devaluation rate and/or to banking sector can have real supply side effects. Moreover, the cross-sectional implications of our model provide a better test regarding the existence of the credit channel of the monetary transmission mechanism than time series evidence. The theoretical implications of the model are broadly consistent with the behavior of the Argentine economy in the aftermath of the “Tequila”.; The third chapter evaluates the macro-economic implications of commercial integration. Specifically, we assess the macro-economic vulnerability of the small Mercosur countries to real devaluations in Brazil by formalizing the concept of regional goods, i.e. goods tradable with Brazil but largely non-tradable with the rest of the world. Theoretically, we find that macro-economic vulnerability to terms of trade shocks originating in the dominant partner depends on the share of regional goods in total output and consumption and not on the net trade position in regional goods. The empirical evidence suggests that the integration strategy pursued by Mercosur countries has created a policy induced distortion which has led to artificial trade in regional goods.