Exchange Crisis in Mexico in 1994–1995

Krzysztof Spirzewski ()

Ekonomia journal, 2008, vol. 21

Abstract: The globalization processes being at present an object of broad scientific research date from a dozen or so years. The beginning of the 1990-ies was the period during which the capital flows were beginning to trespass the state frontiers to a larger and larger degree. Like in the majority of economic processes, two purely financial problems have been connected with this phenomenon: the profit and the risk. The profit is linked to the capital owners' search after interest rates higher than those offered by their domestic financial market. Whereas the second problem, unseparable from the former, concerns the diversification of the assets portfolio in possession at the given moment. The phenomenon of the transfrontier capital flows is particularly noticeable because of its strong impact on local financial markets in the economies of countries of emerging markets. This impact has a two-way character: favourable—by strongly promoting the development based on the inflow of large quantities of lacking capital; negative—by increasing the dependence of the economic development on the foreign capital and, consequently, making this development dependent on the attained macroeconomic indices or, more exactly, on the assessment of such indices arbitrarily made by international financial markets. Such assessments are being compared with the expected ones, e.g. to the expected exchange rate level. Then, there is always risk that non-fulfilled expectations will lead to oscillations as a result of which the monetary authorities will not keep to the earlier planned exchange rate levels [Obstfeld, 1994, s. 211]. The subject of this paper will be the negative consequences that accompany the international capital flows or, more exactly, the exchange crises of 1994–1998 related to the globalization process (see section 1). In section 2, the Mexican exchange crisis of 1994 will be discussed (see section 2), its sources will be presented, as well as the political and economic situation. In section 3, the scale of the economy breakdown, the situation of the banking sector and the remedial measures undertaken will be discussed. The remaining part of the paper is organized as follows: in section 4, an answer will be presented to the question: is it possible do foresee a crisis? The section is divided into a practical and a theoretical concept. Finally, in section 5 conclusions of general character are presented.

Date: 2008
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