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Applications of sudden stops of international capital to the Mexican economy

Paula Lourdes Hernández Verme and Mónica Karina Rosales Pérez
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Paula Lourdes Hernández Verme: Universidad de Guanajuato
Mónica Karina Rosales Pérez: Universidad de Guanajuato

No 2016-74, Working Papers from Peruvian Economic Association

Abstract: There was nothing in the fundamentals of the Mexican economy that would suggest at the moment the beginning of a crisis of such magnitude. The 1994 crisis was extremely unexpected for households and domestic and foreign firms, because there were good economic indicators so far, together with the financial stability of the previous years. The Mexico of 1994 had a de jure fixed exchange rate regime, but in practice, it was an intermediate peg, not a serious hard peg. Our goal is to try to find out whether things would have been different if there would have been instead either a floating exchange rate regime or a hard peg in Mexico at the time of the crisis of 1994. In our aim at trying to answer this question, we set up a Dynamic Stochastic General Equilibrium Model (DSGE) that shared the main stylized characteristics of the Mexican economy of that time. We considered a pure exchange, monetary, small open economy with a DSGE framework in discrete time that obtains from micro-foundations.

Keywords: exchange rate regimes; sudden stops of international capital; bank panics; dynamic stochastic general equilibrium; monetary policy; small open economy (search for similar items in EconPapers)
JEL-codes: E13 E52 E58 F33 G21 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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Handle: RePEc:apc:wpaper:2016-074