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The Mexican Peso Crisis; Overview and Analysis of Credibility Factors

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  • Paul R Masson
  • Pierre-Richard Agénor

Abstract

This paper examines credibility and reputational factors in explaining the December 1994 crisis of the Mexican peso. After reviewing events leading to the crisis, a model emphasizing the inflation-competitiveness trade-off is presented to explain the formation of devaluation expectations. Estimation results indicate that investors appear to have seriously underestimated the risk of devaluation, despite early warning signals. The collapse of confidence that followed the December 20 devaluation may have been the result of a shift in the perceived commitment of the authorities to exchange rate stability.

Suggested Citation

  • Paul R Masson & Pierre-Richard Agénor, 1996. "The Mexican Peso Crisis; Overview and Analysis of Credibility Factors," IMF Working Papers 96/6, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:96/6
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    Cited by:

    1. Tejada, César A. O. & Portugal, Marcelo S., 2002. "Credibility and Reputation: An Application of the External Circumstances Model for the Real Plan," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 56(4), October.
    2. Gary Dymski, 2011. "The International Debt Crisis," Chapters,in: The Handbook of Globalisation, Second Edition, chapter 6 Edward Elgar Publishing.
    3. Pierre-Richard Agénor, 1997. "Borrowing Risk and the Tequila Effect," IMF Working Papers 97/86, International Monetary Fund.
    4. Blejer, Mario I. & del Castillo, Graciana, 1998. ""Deja Vu all over again?": The Mexican crisis and the stabilization of Uruguay in the 1970s," World Development, Elsevier, vol. 26(3), pages 449-464, March.
    5. de Brouwer,Gordon, 1999. "Financial Integration in East Asia," Cambridge Books, Cambridge University Press, number 9780521651486, May.

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