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.
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