The Mexican economic crisis: alternative views
The authors of this article suggest that many of the explanations for the 1994 crisis are based on questionable assumptions and dubious analysis. They contend that, when trying to explain the crisis, most authors have concentrated on the wrong economic "fundamentals." They challenge the conventional view that the crisis was caused by a combination of flawed fiscal, monetary, and exchange rate policies. Their explanation for the crisis belongs in an alternative camp that emphasizes the vulnerability of the Mexican financial system to swings in expectations and investor confidence. ; In their view, the Mexican financial crisis was an expectations-driven liquidity crisis that shares many similarities with the financial panics that afflicted the U.S. economy during the late nineteenth century. The immediate cause of the Mexican crisis was political turmoil that created concern among foreign lenders about the safety of their investments. Mexican borrowers' "over-reliance" on short-term liabilities made both individual borrowers and the financial system extremely vulnerable to the adverse political events that shook the confidence of foreign investors. ; This article's principal policy recommendation is for the Mexican government to set up a system of term-graduated multiple reserve requirements for banks ("circuit breakers"). These would give financial institutions (and direct borrowers) strong incentives to lengthen the average term of their debts and make the country's financial system less susceptible to liquidity crises. The average term of the government's liability portfolio would also increase, reducing its own vulnerability to liquidity crises.
Volume (Year): (1996)
Issue (Month): Jan ()
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
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Harvard Institute of Economic Research Working Papers
1724, Harvard - Institute of Economic Research.
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- Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," NBER Working Papers 5142, National Bureau of Economic Research, Inc.
- Harold L. Cole & Timothy J. Kehoe, 2000.
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- William Roberds, 1995. "Financial crises and the payments system: lessons from the National Banking Era," Economic Review, Federal Reserve Bank of Atlanta, issue Sep, pages 15-31.
- Espinosa-Vega, Marco A, 1995. "Multiple Reserve Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 762-76, August.
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