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The Mexican Peso Crisis: Sudden Death or Death Foretold?

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  • Jeffrey Sachs
  • Aaron Tornell
  • Andres Velasco

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

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5563.

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Date of creation: May 1996
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Publication status: published as Sachs, Jeffrey & Tornell, Aaron & Velasco, Andres, 1996. "The Mexican peso crisis: Sudden death or death foretold?," Journal of International Economics, Elsevier, vol. 41(3-4), pages 265-283, November.
Handle: RePEc:nbr:nberwo:5563

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  1. Paul R. Masson & Allan Drazen, 1994. "Credibility of Policies Versus Credibility of Policymakers," IMF Working Papers 94/49, International Monetary Fund.
  2. Lars E.O. Svensson, 1993. "Fixed Exchange Rates as a Means to Price Stability: What Have We Learned," NBER Working Papers 4504, National Bureau of Economic Research, Inc.
  3. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, American Economic Association, vol. 76(1), pages 72-81, March.
  4. Ozkan, F. Gulcin & Sutherland, Alan, 1998. "A currency crisis model with an optimising policymaker," Journal of International Economics, Elsevier, Elsevier, vol. 44(2), pages 339-364, April.
  5. 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.
  6. Ozkan, F Gulcin & Sutherland, Alan, 1995. "Policy Measures to Avoid a Currency Crisis," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(429), pages 510-19, March.
  7. Rose, A.K. & Svensson, L.E.O., 1993. "European Exchange Rate Credibility Before the Fall," Papers, Stockholm - International Economic Studies 542, Stockholm - International Economic Studies.
  8. Cukierman, Alex & Leiderman, Leonardo & Spiegel, Yossi, 1994. "Choosing the Width of Exchange Rate Bands - Credibility vs. Flexibility," CEPR Discussion Papers, C.E.P.R. Discussion Papers 907, C.E.P.R. Discussion Papers.
  9. Maurice Obstfeld, 1991. "Destabilizing Effects of Exchange-Rate Escape Clauses," NBER Working Papers 3603, National Bureau of Economic Research, Inc.
  10. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers 5191, National Bureau of Economic Research, Inc.
  11. Guillermo A. Calvo & Enrique G. Mendoza, 1996. "Mexico's balance-of-payments crisis: a chronicle of death foretold," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 545, Board of Governors of the Federal Reserve System (U.S.).
  12. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, Elsevier, vol. 17(1-2), pages 1-13, August.
  13. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 589-610, August.
  14. Sachs, Jeffrey & Tornell, Aaron & Velasco, Andres, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," Working Papers, C.V. Starr Center for Applied Economics, New York University 95-22, C.V. Starr Center for Applied Economics, New York University.
  15. de Kock, Gabriel & Grilli, Vittorio, 1993. "Fiscal Policies and the Choice of Exchange Rate Regime," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 103(417), pages 347-58, March.
  16. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  17. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  18. 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.
  19. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  20. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, American Economic Association, vol. 78(4), pages 647-61, September.
  21. Velasco, Andres, 1987. "Financial crises and balance of payments crises : A simple model of the southern cone experience," Journal of Development Economics, Elsevier, Elsevier, vol. 27(1-2), pages 263-283, October.
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