- **International reserves:** in the monthly analysis, the stock of foreign exchange reserves held by the Central Bank of Argentina in US dollars is deflated by US CPI ( _res_ ).<sup>20</sup> In the annual analysis, international reserves are expressed as a percentage of GDP ( _resY_ ).

- **Trade openness:** in the monthly analysis, total trade (exports plus imports) in US dollars is deflated by US CPI ( _trade_ ). In the annual analysis, trade is expressed as a percentage of GDP ( _tradeY_ ).

We also considered a range of other variables that are not in our preferred specification, namely: real interest rate differentials,<sup>21</sup> net foreign assets deflated by US CPI (nfa), government spending deflated by CPI (gov), money supply defined as broad money in circulation deflated by CPI as a measure of monetary policy (m2).<sup>22</sup> The full list of variables considered in our analysis is found in Appendix Table A.1.

# **_Data Adjustments_**

Our analysis deals with potential data mismeasurement, whereby official and private sector inflation and output estimates differed substantially in recent years. Alleged manipulations of depressed inflation and inflated growth figures have undermined the credibility of official statistics and led to widespread reliance on private sector parallel estimates of the inflation rate and output growth. To deal with this, we construct adjusted measures of the REER and productivity differentials.

If domestic prices are indeed underestimated, as is possibly the case for Argentina,<sup>23</sup> the REER would also be underestimated. We therefore complement the analysis by considering a measure of the REER that corrects for this. Data for the monthly real effective exchange rate, starting in 1994, is obtained from the BIS. We adjust this measure for cumulative monthly discrepancies between official (INDEC) and private sector inflation estimates since November 2007 from PriceStats, thereby constructing an adjusted measure of the REER (see Figure 3).

We furthermore consider the case where CPI is possibly underestimated relative to PPI and adjust the CPI/PPI ratio upward by a cumulative 30% over 2008-2015, consistent with an estimated long-run relationship between the two price indices (average CPI inflation being higher than PPI inflation by 0.5%).<sup>24</sup> We also conduct a

> 20 We find other measures used in the literature, such as reserves as a percent of imports, to be I(0). 21 Real interest rate differentials between Argentina and countries such as Brazil and the US are found to be I(0), and therefore excluded from the cointegration estimation. Moreover, the presence of capital controls in Argentina is expected to mitigate the effects of this variable, as it violates the UIP condition that otherwise equalizes real interest rates.

> 22 Other papers have used this variable in log-differences but we find this measure to be I(0).

> 23 The official national and urban consumer price index (IPCNu) by INDEC, measured an annual inflation rate of 24% in 2014, lower than the implicit GDP deflator and much lower than inflation figures estimated by the private sector reaching close to 40% (see Figure 2). PriceStats−a specialist provider of inflation rates published by State Street, a financial services firm−estimates that since November 2007, cumulative inflation has reached 484% compared to 141% according to official estimates. “Congress” CPI inflation, which is calculated by averaging the measurements of eight independent consultants starting in 2011, estimates figures close to PriceStats and suggests that inflation averaged approximately 25% over the years 2011-2013.

24 On average, PPI historically tracks CPI closely in Argentina, with CPI inflation averaging 0.5% higher than PPI inflation over the period 1993-2007 (where average annual inflation is measured excluding the years 2002-03, due to large price adjustments following the devaluation, and the period before 1993 due to hyperinflation episodes). By contrast, the CPI/PPI ratio has been falling since 2008 since reported 13