International Finance Discussion Papers (IFDP)
March 1996
Mexico's Balance-of-Payments Crisis: A Chronicle of Death Foretold
Guillermo A. Calvo and Enrique G. Mendoza
Abstract:
This paper claims that the roots of Mexico's balance-of-payments crisis are found in the prevailing high degree of capital mobility and financial globalization. Under these circumstances, shifts in foreign capital flows and anticipation of a banking-system bailout may produce large imbalances between stocks of financial assets and foreign reserves, threatening the sustainability of currency pegs. Econometric analysis suggests that 1/2 of Mexico's reserve losses could be accounted for by these phenomena. Large financial imbalances are also fertile ground for self-fulfilling-prophesy crises which lead devaluations to produce deep recessions. These difficulties can be partly remedied by appropriate policies.
PDF: Full Paper
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