The Macroeconomics of the Mexican Crisis: A Simple Two-period Model

Gregor Irwin and David Vines

No 1241, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyse the events leading to the devaluation of the Mexican peso last year, using a simple two-period model. We view the problem as a race between a foreign investment led demand boom and the potential expansion in supply which might follow; the outcome of such a race is inherently uncertain. If, in an exchange rate based stabilization programme, supply does not keep pace with demand, competitiveness problems will eventually result in lower output, and consequently the government might be tempted to devalue. In Mexico it would also appear that the costs and benefits of maintaining the regime were adversely affected by a reduction in the amount of external financing available.

Keywords: Capital Inflow; Exchange Rate Crisis; Macroeconomic Stabilization; Mexico (search for similar items in EconPapers)
JEL-codes: F31 F32 F41 (search for similar items in EconPapers)
Date: 1995-09
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