The purpose of this paper is twofold. First, we would argue that, despite the fact that some elements of contagion were present, irrational behavior should not be regarded as the main explanation for the Uruguayan collapse. Financial fragility, due to liability dollarization and a misdesigned safety net, together with the strong real exchange rate depreciation and spillover effects derived from the Argentinean crisis, led to a rational simultaneous run on both the domestic banking system and the public debt (sudden stop). Secondly, we look at the crisis resolution strategies and see why the first two attempts failed despite the large backup from International Financial Institutions, and the third succeeded. We take a look at the recovery of the Uruguayan economy and point out some basic lessons to be learned from the Uruguayan experience

This paper presents new evidence on wage and price setting based on a survey of more than 300 Uruguayan firms in 2013. Most of the firms set prices considering costs and adding a profit margin; therefore, they have some degree of market power. The evidence indicates that price increases appear quite flexible in Uruguay (prices are downward rigid). Most of the firms adjust their prices on an irregular basis, which suggests that price changes in Uruguay are statedependent, although wage changes are concentrated in January and July. Interestingly, the cost of credit is seen as an irrelevant factor in explaining price increases. We also find that cost reduction is the principal strategy to a negative demand shock, and finally, that the adjustment of prices to changes in wages is relatively quick.

This study is an empirical analysis of the factors associated with the use of the US dollar for the invoicing of domestic transactions, which is a common practice of Uruguayan firms. Using a novel dataset we find that both the input and debt structure of firms are relevant for determining their currency of invoicing. Intuitively, firms will generate cash flows in US dollar if they have to make expenditures in foreign currency, either because they use imported inputs or if they cover debt services with currency risk. This practice can be seen as a hedging strategy to mitigate exchange risk in a highly dollarized economy. We empirically show that firms use their flows position to hedge currency mismatches in their stocks; domestic invoicing in US dollar is correlated with large negative financial positions, and the share of imported inputs and of exports.

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