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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Mexico's balance-of-payments crisis: a chronicle of death foretold
Guillermo A. Calvo
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.


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Guillermo A. Calvo & Enrique G. Mendoza, Mexico's balance-of-payments crisis: a chronicle of death foretold, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 545, 1996.
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Keywords: Balance of payments ; Mexico ; Financial crises - Mexico
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