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What is the impact of large swings in economic policy on the risk-return trade-off faced by i nvestors? What is the impact of changes in policy regimes on investment strategies? In this paper we study the impact on returns of switches between periods of market-friendly economic policies and periods of populist policies. To quantify the impact of policy instability, we use data from Argentina--a country that has experienced frequent and very large regime changes--and find that the risk-return for individual assets and minimum variance portfolios are quite different across regimes. We then develop a dynamic model to understand optimal portfolios when investors are cognizant that regimes can change. We find that when portfolios are unrestricted, it is optimal for investors to take a large amount of risk. On the other hand, when portfolios are restricted to include only long positions, a real asset (real estate) dominates financial assets. [ABSTRACT FROM AUTHOR]

Debt crises in emerging markets have been linked to large fiscal deficits, high inflation rates, and large devaluations. This article studies a sovereign default model with domestic fiscal and monetary policies to understand Argentina's experience during the 2000s commodity boom (2005-2017), following the default of 2001. The model suggests that domestic policies played a critical role in Argentina's poor economic performance. Despite exceptionally favorable terms of trade, a rise in government spending led to higher taxation, inflation and currency depreciation, and lower output. Economic performance would have been worse had Argentina followed a strict, rather than accommodative, monetary policy without curbing its expansionary fiscal policy. Finally, limited access to international credit markets during this episode did not appear to play a significant role. [ABSTRACT FROM AUTHOR]

The authors study the nature of the optimal monetary policy in a regime of fiscal dominance when the monetary authority-which can print money or issue interest-earning debt-is required to finance an exogenous sequence of transfers to the Treasury. They show that the degree of commitment on the part of the monetary authority has a significant impact on the details of the optimal policy. They apply this model to the recent experience of Argentina and find that the inflation rate experienced by Argentina during the first year of the monetary program is close to the predictions of a weakly time-consistent solution. Moreover, consistent with both versions of their model-full commitment and weak time consistency-the Central Bank of Argentina has increased the ratio of interest-earning debt relative to the monetary base. [ABSTRACT FROM AUTHOR]