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In the early 1990s the Mexican economy seemed healthy, growing again after stumbling through the 1980s. Culminating in implementation of the North American Free Trade Agreement at the beginning of 1994, Mexico's rise above hard times seemed secure. Less than twelve months later, though, the country faced economic disaster, with devaluation of the peso in December and a financial crisis set in motion that cut the peso's value in half, stimulated inflation, and set off a severe recession.
The two articles in this issue offer differing perspectives on this economic crisis in Mexico. Joe Whitt discusses the devaluation as the inevitable result of fiscal, monetary, and exchange rate policy imbalances in the Mexican economy that might have been corrected by earlier adjustments in macroeconomic policy. Marco Espinosa and Steven Russell systematically review this conventional view of the crisis. Their analysis casts doubts about its validity. They present an alternative view emphasizing deepening investor concerns about the safety of Mexican financial obligations combined with the short-term nature of the bulk of Mexican debt. Their policy recommendations deal mainly with the term structure of private debt.
Each article is an integrated whole in itself, chronicling the historical events that led to the crisis and interpreting them in terms of its authors' views. Presented together, the two articles demonstrate how different economic models influence the interpretation of events and in turn lead to different policy prescriptions.
|1||The Mexican Peso Crisis
Joseph A. Whitt, Jr.
Hoping to avoid an economic slowdown during 1994, Mexico tried to maintain its quasi-pegged exchange rate while limiting monetary tightening by engaging in massive sterilized intervention—a policy that is not sustainable for long. The ultimate result was a collapse of the exchange rate, soaring interest rates, and probably a far worse recession than would have occurred if monetary policy had been tightened.
|21||The Mexican Economic Crisis: Alternative Views
Marco Espinosa and Steven Russell
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.
Senior Vice President and
Director of Research
Robert A. Eisenbeis
B. Frank King, Vice President and Associate Director of Research
Mary Susan Rosenbaum, Vice President, Macropolicy
Roberto Chang, Research Officer, Macropolicy
Thomas J. Cunningham, Research Officer, Regional
William Roberds, Research Officer, Macropolicy
Larry D. Wall, Research Officer, Financial
Bobbie H. McCrackin, Vice President
Joycelyn Trigg Woolfolk, Editor
Lynn H. Foley, Managing Editor
Carole L. Starkey, Graphics
Ellen Arth, Circulation
Linda Mundy, Administrative Assistance
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