The Mexican Peso Crisis: Sudden Death or Death Foretold?

Jeffrey Sachs, Aaron Tornell and Andres Velasco

No 5563, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We argue that allowing for the possibility of a self-fulfilling panic helps in understanding several features of the recent Mexican crisis. Self-fulfilling expectations became decisive in generating a panic only after the government ran down gross reserves and ran up short-term dollar debt. We present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt, but not for others. Lastly, we argue that the imperfect credibility of Mexican exchange rate policy made it advisable to follow more contractionary fiscal and monetary policies in 1994. Our model formalizes the reasons why this is so.

JEL-codes: E52 F31 (search for similar items in EconPapers)
Date: 1996-05
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (137)

Published as Sachs, Jeffrey & Tornell, Aaron & Velasco, Andres, 1996. "The Mexican peso crisis: Sudden death or death foretold?," Journal of International Economics, Elsevier, vol. 41(3-4), pages 265-283, November.

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Journal Article: The Mexican peso crisis: Sudden death or death foretold? (1996)
Working Paper: The Mexican Peso Crisis: Sudden Death or Death Foretold? (1996)
Working Paper: The Mexican Peso Crisis: Sudden Death or Death Foretold? (1996)
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