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The Mexican peso crisis: Sudden death or death foretold?

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  • Sachs, Jeffrey
  • Tornell, Aaron
  • Velasco, Andres

Abstract

We argue that allowing for the possibility of a self-fulfilling panic helps in understanding several features of the recent Mexican crisis. Self-fulfilling expectations became decisive in generating a panic only after the government ran down gross reserves and ran up short-term dollar debt. We present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt, but not for others. Lastly, we argue that the imperfect credibility of Mexican exchange rate policy made it advisable to follow more contractionary fiscal and monetary policies in 1994. Our model formalizes the reasons why this is so.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 41 (1996)
Issue (Month): 3-4 (November)
Pages: 265-283

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Handle: RePEc:eee:inecon:v:41:y:1996:i:3-4:p:265-283

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Web page: http://www.elsevier.com/locate/inca/505552

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  1. Velasco, Andres, 1987. "Financial crises and balance of payments crises : A simple model of the southern cone experience," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 263-283, October.
  2. Drazen, Allan & Masson, Paul R, 1994. "Credibility of Policies versus Credibility of Policymakers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 735-54, August.
  3. Ozkan, F. Gulcin & Sutherland, Alan, 1998. "A currency crisis model with an optimising policymaker," Journal of International Economics, Elsevier, vol. 44(2), pages 339-364, April.
  4. Maurice Obstfeld., 1996. "Destabilizing Effects of Exchange-Rate Escape Clauses," Center for International and Development Economics Research (CIDER) Working Papers C96-075, University of California at Berkeley.
  5. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
  6. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  7. Svensson, Lars E. O., 1994. "Fixed exchange rates as a means to price stability: What have we learned?," European Economic Review, Elsevier, vol. 38(3-4), pages 447-468, April.
  8. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," Harvard Institute of Economic Research Working Papers 1724, Harvard - Institute of Economic Research.
  9. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
  10. Maurice Obstfeld & Kenneth Rogoff, 1995. "The mirage of fixed exchange rates," Working Papers in Applied Economic Theory 95-08, Federal Reserve Bank of San Francisco.
  11. Rose, Andrew K & Svensson, Lars E O, 1993. "European Exchange Rate Credibility Before the Fall," CEPR Discussion Papers 852, C.E.P.R. Discussion Papers.
  12. Guillermo A. Calvo & Pablo E. Guidotti, 1990. "Credibility and Nominal Debt: Exploring the Role of Maturity in Managing Inflation," IMF Staff Papers, Palgrave Macmillan, vol. 37(3), pages 612-635, September.
  13. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  14. Ozkan, F Gulcin & Sutherland, Alan, 1995. "Policy Measures to Avoid a Currency Crisis," Economic Journal, Royal Economic Society, vol. 105(429), pages 510-19, March.
  15. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  16. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  17. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
  18. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  19. Rudiger Dornbusch & Alejandro Werner, 1994. "Mexico: Stabilization, Reform, and No Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 253-316.
  20. Cukierman, Alex & Leiderman, Leonardo & Spiegel, Yossi, 1994. "Choosing the Width of Exchange Rate Bands - Credibility vs. Flexibility," CEPR Discussion Papers 907, C.E.P.R. Discussion Papers.
  21. de Kock, Gabriel & Grilli, Vittorio, 1993. "Fiscal Policies and the Choice of Exchange Rate Regime," Economic Journal, Royal Economic Society, vol. 103(417), pages 347-58, March.
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