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Stabilization and growth recovery in Mexico : lessons and dilemmas

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  • Oks, Daniel F.

Abstract

Before 1988,"orthodox"policies (fiscal discipline and tight money) failed to bring inflation down and induce a sustained economic recovery. The Mexican stabilization plan announced in December 1987 (the Pact) shows that the right combination of orthodox and"heterodox"policies (for example, income policies) can meet, and has met, both objectives. The author shows that although many orthodox adjustments began before the Pact, considerable further adjusting was needed before it could succeed. To make the stabilization credible required significantly tighter fiscal policy and a lengthening of the maturities of domestic debt between 1988 and 1990. A key factor behind high real interest rates during the recent Mexican stabilization plan was the initially low credibility of the fixed - and later the preannounced - exchange rate. While it is difficult to assess what establishes credibility, we can hypothesize about the factors that may hamper it. Crucial among them is the consistency of the macroeconomic policy framework, where fiscal policy plays a key role. Domestic debt management also matters as the probability of a successful run on the peso increases with the amount of government liabilities that could, in a given period, be exchanged for foreign reserves. In the short term, Mexico may not have other options than further tightening its fiscal and monetary policies. Over the medium term, however, a real peso depreciation appears necessary.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 833.

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Date of creation: 31 Jan 1992
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Handle: RePEc:wbk:wbrwps:833

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Related research

Keywords: Economic Theory&Research; Environmental Economics&Policies; Economic Stabilization; Strategic Debt Management; Banks&Banking Reform;

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  1. Edward, Sebastian, 1986. "Are Devaluations Contractionary?," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 501-08, August.
  2. Francesco Giavazzi & Marco Pagano, 1989. "Confidence Crises and Public Debt Management," NBER Working Papers 2926, National Bureau of Economic Research, Inc.
  3. van Wijnbergen, Sweder, 1991. "Debt Relief and Economic Growth in Mexico," World Bank Economic Review, World Bank Group, vol. 5(3), pages 437-55, September.
  4. Andrew M. Warner, 1991. "Did the debt crisis or the oil price decline cause Mexico's investment collapse?," International Finance Discussion Papers 416, Board of Governors of the Federal Reserve System (U.S.).
  5. Manmohan S. Kumar & Pablo Emilio Guidotti, 1991. "Domestic Public Debt of Externally Indebted Countries," IMF Occasional Papers 80, International Monetary Fund.
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