Lessons from the Mexico Crisis

Abstract:     
First, the paper discusses salient aspects of the Mexican reforms and its 1989-1994 recovery, making no attempt to be comprehensive but instead focusing on developments of direct relevance for the argument. Next, it discusses three important features of the crisis and renewed recovery: Recovery was rapid, the domestic financial system was pivotal, and fiscal policy was contractionary. The paper evaluates four reasons that are often given for the causes of the Mexican crisis: a faulty exchange-rate policy; low domestic saving; large current account deficits; and the issuance, mainly during 1994, of the tesobonos. Three alternative lessons of the crisis are presented.

JEL Classification: F34, F35

working papers series