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IMF Country Report No. 16/347

ARGENTINA

SELECTED ISSUES

November 2016

This Selected Issues paper on Argentina was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed on October 26, 2016.

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© 2016 International Monetary Fund

ARGENTINA

SELECTED ISSUES

October 26, 2016

Approved By

Nigel Chalk

Contents

• HOW LARGE IS ARGENTINA’S CAPITAL ACCUMULATION GAP AND HOW CAN IT BE REDUCED? LESSONS FROM PAST INVESTMENT SURGES

• A. Introduction

• B. Assessing Argentina's "Capital Accumulation Gap"

• C. What Drives Investment Surges? An Event Analysis

• References

• FIGURES

• 1. Nominal Fixed Capital Formation: 1981–2015

• 2. Private Nominal Fixed Capital Formation: 1981–2015

• 3. Public Nominal Fixed Capital Formation: 1981–2015

• 4. GDP Per Capita: 1981–2015

• 5. Factors of Production, Alternative Data Sources: 1981–2015

• 6. Capital-to-Output Ratio: 1980–2014

• 7. Capital-to-Labor Ratio: 1980–2015

• 8. Growth in Capital-Labor Ratio Required to Catch Up with Peer Median

• 9. Investment Required to Reach Median Capital-to-Labor Intensity

• 10. Capital/Output and Investment Rate in 2014, Relative to Estimated Long-Run Levels

• 11. Sensitivity of Steady-State Investment Rates to Alternative Parameter Specification

• 12. Infrastructure Indicators: Argentina’s Percentile in Distribution of Peer Advanced and Emerging Markets

• 13. Event Analysis Charts

• 14. Frequency of Investment Surge Episodes

• TABLES

• 1. Investment Surge Episodes: 1981–2015

• 2. Hodges-Lehman Median Differences on Investment Surge Episodes

• 3. Direction of Variation of Key Variables During Episodes

• 4. Bilateral Panel Logit Regressions

• 5. Multilateral Panel Logit Regressions

• ANNEXES

• I. Panel Investment and Growth

• II. Panel Production Function

• III. Panel Charts for Selected Investment Surge Episodes

• ARGENTINA’S FISCAL ADJUSTMENT: HOW CAN IT BE DONE?

• A. Introduction

• B. Primary Expenditure

• C. Tax Revenues

• D. Assessing the Economic Impact of Fiscal Consolidation

• References

• BOXES

• 1. Decomposing the Price and Volume Effects Driving Public Expenditure Growth

• 2. Measuring the Impact of Subsidy Reform on the Most Vulnerable

• FIGURE

• 1. Partially Credible Policies, With vs. Without Monetary Reaction

• ANNEX

• I. Model Description and Fiscal Policy Analysis

• ARGENTINA’S PENSION AND SOCIAL SECURITY SYSTEM: A SUSTAINABILITY ANALYSIS

• A. Introduction

• B. The System

• C. Reform Proposals

• References

• BOXES

• 1. Argentina’s Current Pension System

• 2. The Indexation Formula (La Fórmula de Movilidad)

• 3. History of Argentina’s Social Security System

• FIGURE

• 1. Argentina: Social Security Coverage, Benefits, and Spending

• ANNEX

• I. The Model

• DISINFLATION UNDER INFLATION TARGETING: A SMALL MACRO MODEL FOR ARGENTINA

• A. The Model

• B. Data and Estimation

• C. Implications for Monetary Policy

• References

• FIGURES

• 1. Impulse Response to an Interest Rate Shock

• 2. Impulse Response to a Domestic Demand Shock

• 3. Argentine Disinflation Path with Optimal Policy Rule

• 4. Sensitivity of Potential Output Cost of Disinflation to Different Degrees of Inflation Inertia

• 5. Sensitivity of Potential Output Cost of Disinflation to Weights in Loss Function

• 6. Simulations of Disinflation with Real Exchange Rate Volatility in Loss

• TABLE

• 1. Parameter Estimates

• ANNEX

• I. The Model

• ENHANCING THE EFFECTIVENESS OF INFLATION TARGETING IN ARGENTINA

• A. Introduction

• B. The Road to Inflation Targeting

• C. Strengthening the Institutional Foundations of Monetary Policy

• D. Further Refinements on the Monetary Policy Framework

• References

• BOXES

• 1. A Snapshot of Inflation and Stabilization Plans in Argentina in the Last 50 Years

• 2. Inflation Inertia in Argentina and Other Selected Latin American Countries

• 3. Key Principles to Rule Central Bank Credit to the Government

• FIGURES

• 1. Moderate Inflation in Argentina

• 2. Inflation Expectations

• 3. Inflation at Inception of Inflation Targeting

• 4. Moderate Inflation Episodes and Convergence to Low Inflation

• 5. Primary Balance at Inflation Targeting Inception

• 6. Independence of the BCRA

• 7. Central Bank Independence

• TABLE

• 1. Monetary Policy Decision-Making in Selected Inflation Targeting Countries

• APPENDICES

• I. Monetary Policy

• II. Turkey’s Transition to Inflation Targeting

• ARGENTINA’S EXPORTS AND COMPETITIVENESS: A SECTORAL VIEW ON TRENDS AND PROSPECTS

• A. Introduction

• B. Argentina’s Exports Over the Last Decade: A Few Trends

• C. Price Competitiveness: A Product-Level Analysis

• D. Non-Price Competitiveness: A Few Considerations

• References

• FIGURES

• 1. Price Competitiveness

• 2. Argentina’s Exports: Changes in Composition and Market Share

• APPENDICES

• I. Data Sources and Description

• II. Empirical Results and Robustness Analysis

• MEDIUM-TERM PROSPECTS FOR ARGE NTINA’S EXTERNAL BALANCE SHEET

• A. Introduction

• B. The External Balance Sheet Today

• C. Estimating the Medium-Term Position

• D. Conclusion

• FIGURES

• 1. IIP by Asset and Liability Type, 2002–15

• 2. Capital Account Oppeness Index,

• 3. IIP Relative to Regional Peers, 2014

• 4. Sectoral Breakdown of External Debt, 2015Q2

• 5. Currency Composition of External Assets and Liabilities, 2012

• 6. Maturity Structure of External Debt, 2015Q2

• 7. External Assets and Liabilities

• 8. Net IIP

• 9. Selected Indicators from External Balance Sheet Expansion Episodes

• TABLE

• 1. Initial Conditions for Event Analysis Episodes

• APPENDIX