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
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Last update: July 19, 2001