The Mexican Peso Crisis: Overview and Analysis of Credibility Factors

36 Pages Posted: 15 Feb 2006

See all articles by Paul R. Masson

Paul R. Masson

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

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Date Written: January 1996

Abstract

This paper examines credibility and reputational factors in explaining the December 1994 crisis of the Mexican peso. After reviewing events leading to the crisis, a model emphasizing the inflation-competitiveness trade-off is presented to explain the formation of devaluation expectations. Estimation results indicate that investors appear to have seriously underestimated the risk of devaluation, despite early warning signals. The collapse of confidence that followed the December 20 devaluation may have been the result of a shift in the perceived commitment of the authorities to exchange rate stability.

JEL Classification: E42, F31, F41

Suggested Citation

Masson, Paul R. and Agenor, Pierre-Richard, The Mexican Peso Crisis: Overview and Analysis of Credibility Factors (January 1996). Available at SSRN: https://ssrn.com/abstract=882907 or http://dx.doi.org/10.2139/ssrn.882907

Paul R. Masson (Contact Author)

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

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Washington, DC 20431
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The Brookings Institution ( email )

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202-797-2968 (Fax)

Pierre-Richard Agenor

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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