Adjustment Uncertainty, Confidence, and Growth: Latin America after the Debt Crisis

Abstract

Usual interpretations of the debt crisis identify the fall in foreign savings as the determinant of lower investment. In contrast, this paper presents a systemic interpretation of the crisis, based on adjustment uncertainty and confidence failures, in which capital flight and the contraction of investment and foreign lending are various facets of the same phenomenon. After exploring the macroeconomics of confidence gaps, a model is presented that generates endogenous adjustment uncertainty and identifies a concept of vulnerability as a key determinant of adjustment dynamics. Various policies to reduce vulnerability are reviewed, with particular emphasis on fiscal adjustment, indexation, and liberalization.