The Political Economy of Failed Macroeconomic Adjustment - Evidence from Argentina

In this paper, I study whether macroeconomic adjustment programs are negatively affected by shocks to government stability that illustrate a lack of social consensus regarding the stabilization agenda and therefore negatively affect the context in which adjustments are executed. Such shocks raise the expectation that the government is not willing or able to successfully implement the challenging policy measures. I apply the synthetic control method to a plausibly exogenous shock to government stability during the adjustment program of the Macri administration in Argentina (2015-2019). The results provide robust empirical evidence that the shock caused a nominal devaluation of the Argentine currency of around 15 % in 7 weeks, anticipating the subsequent failure of the program.