Borrowing Risk and the Tequila Effect

37 Pages Posted: 15 Feb 2006

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Date Written: July 1997

Abstract

This paper models the Tequila effect (triggered by the collapse of the Mexican peso in December 1994) as a temporary increase in the risk premium faced by domestic private borrowers on world capital markets. The effects of this shock are studied in an intertemporal optimizing framework where firms` demand for working capital is financed by bank credit. Under the assumption that the perceived duration of the shock is sufficiently long, the model is capable of reproducing some of the main features of Argentina`s economic downturn in the aftermath of the collapse of the Mexican peso: the rise in domestic interest rates, the reduction in net private capital inflows and the drop in official reserves, the reduction in bank deposits and credit supply, the fall in private consumption, the contraction in output, and the increase in unemployment.

Keywords: Default risk, intertemporal models, temporary shocks

JEL Classification: E44, F32, F34

Suggested Citation

Agenor, Pierre-Richard, Borrowing Risk and the Tequila Effect (July 1997). IMF Working Paper, Vol. , pp. 1-37, 1997. Available at SSRN: https://ssrn.com/abstract=882592

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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