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The Macroeconomics of the Mexican Crisis: A Simple Two-period Model

Author

Listed:
  • Irwin, Gregor
  • Vines, David

Abstract

We analyse the events leading to the devaluation of the Mexican peso last year, using a simple two-period model. We view the problem as a race between a foreign investment led demand boom and the potential expansion in supply which might follow; the outcome of such a race is inherently uncertain. If, in an exchange rate based stabilization programme, supply does not keep pace with demand, competitiveness problems will eventually result in lower output, and consequently the government might be tempted to devalue. In Mexico it would also appear that the costs and benefits of maintaining the regime were adversely affected by a reduction in the amount of external financing available.

Suggested Citation

  • Irwin, Gregor & Vines, David, 1995. "The Macroeconomics of the Mexican Crisis: A Simple Two-period Model," CEPR Discussion Papers 1241, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1241
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    More about this item

    Keywords

    Capital Inflow; Exchange Rate Crisis; Macroeconomic Stabilization; Mexico;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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