Working Paper

Mexico's balance-of-payments crisis: a chronicle of death foretold

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.

Keywords: Balance of payments; Mexico; Financial crises - Mexico;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 1996

Number: 545