Credibility, Reputation, and the Mexican Peso Crisis

Posted: 11 Sep 1998

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Paul R. Masson

International Monetary Fund (IMF) - Research Department; The Brookings Institution

Abstract

A model emphasizing the tradeoff between the costs of changes of domestic interest rates and exchange rate stability is used to assess the role of credibility and reputational factors in the lead-up to the December 1994 crisis of the Mexican peso. Devaluation expectations are decomposed into the probability that the authorities do not truly put a high weight on exchange rate stability and the probability that an exogenous shock will make a devaluation the preferred policy. Estimates indicate that prior to the peso collapse there was no significant increase in devaluation fears and no perceived shift in the authorities' policy preferences. But the increase in the differential that occurred after the devaluation may have resulated from such a shift.

JEL Classification: F31

Suggested Citation

Agenor, Pierre-Richard and Masson, Paul R., Credibility, Reputation, and the Mexican Peso Crisis. Journal of Money, Credit, and Banking, Vol. 31, No. 1, February 1999. Available at SSRN: https://ssrn.com/abstract=121437

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Paul R. Masson

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

The Brookings Institution ( email )

1775 Massachusetts Ave. NW
Washington, DC 20036-2188
United States
202-797-6278 (Phone)
202-797-2968 (Fax)

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