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María Soledad Martínez Pería: The paper by della Paolera and Taylor provides a historical interpretation of crises in Argentina since the 1880s. The study highlights the common features of these episodes and discusses the important differences between the present and the past. Understanding how past events relate to present circumstances is a valuable exercise, and the authors should be highly commended for this effort.

According to the authors, the common thread running through all crises in Argentina is the interaction of a weak, undisciplined, or corruptible banking sector and some other group of conspirators from the public or private sector that hastens its collapse. In other words, twin crises in Argentina have largely been the result of a form of crony finance, which has been referred to as gaucho banking. They argue that gaucho banking destabilized internal and external convertibility and thus led to the collapse of the exchange rate regime.

The authors' historical analysis of crises in Argentina focuses on the two currency board experiments that resulted in the 1929 and 2001 crises. To illustrate how crises may occur under a currency board and a fractional reserve banking system, they develop a dynamic model in which inside money is driven by the behavior of banks and outside money dynamics respond to capital flows (or gold flows in the case of the 1920s). The model yields multiple equilibria depending on whether banks' behavior is motivated by good or crony intentions. Furthermore, a number of shocks (namely, country risk shocks, hotter money shocks, illiquid asset shocks, and a so-called bank robbery shock) can move the economy from the good to the bad equilibrium.

The authors argue that in 1929 the pollution of the banking sector balance sheet (that is, gaucho banking) brought about external instability. In other words, the government bailout of reckless banks led to the collapse of convertibility. These events had their origin in the emergency rediscount law of 1914 that allowed the Banco de la Nación to provide assistance to troubled banks. In 2001, the insolvency of the public sector combined with bank complicity (that is, aided by the behavior of gaucho bankers) led to the collapse of the banking sector and the most recent currency board. They claim that, in particular, the changes in the macroeconomic and central bank regime brought about by Cavallo after April 2001 triggered the crisis that ensued.

While the gaucho story put forth in the paper is compelling, the evidence offered by the authors to support the notion that this was a crucial element behind the recent crisis is weak. The authors present two main arguments to back this hypothesis: first, that banks had the previous episodes of bailouts that occurred in Argentina fresh in their minds; second, that the banks' acceptance of the megaswap proved that they were in collusion with the government.

Neither of these arguments is sufficient evidence of gaucho banking. In the first case, it is unclear why banks would perceive the situation in 2001 as similar to that of crises in the 1970s and 1980s rather than of the more recent tequila crisis, when a number of banks were allowed to fail. If anything, the asymmetric pesification adopted by the government (where dollar loans and deposits were converted into pesos at different exchange rates, causing large immediate losses for banks) and the lack of access to the Central Bank rediscount window indicate that it would not have been rational for banks (at least private banks) to expect a government bailout. Regarding the notion that the megaswap proved that banks were allied with the government, it is not clear why this would be the case when the authors themselves argue and cite studies (such as the paper by de la Torre, Levy Yeyati, and Schmukler included in this volume) showing that the government had to use moral suasion to persuade banks. At the same time, two statements made by the authors indicate that there was nothing endemically corrupt or prone to cronyism in private...