Stabilization and growth recovery in Mexico: lessons and dilemmas

Daniel Oks ()

No 833, Policy Research Working Paper Series from The World Bank

Abstract: Before 1988,"orthodox"policies (fiscal discipline and tight money) failed to bring inflation down and induce a sustained economic recovery. The Mexican stabilization plan announced in December 1987 (the Pact) shows that the right combination of orthodox and"heterodox"policies (for example, income policies) can meet, and has met, both objectives. The author shows that although many orthodox adjustments began before the Pact, considerable further adjusting was needed before it could succeed. To make the stabilization credible required significantly tighter fiscal policy and a lengthening of the maturities of domestic debt between 1988 and 1990. A key factor behind high real interest rates during the recent Mexican stabilization plan was the initially low credibility of the fixed - and later the preannounced - exchange rate. While it is difficult to assess what establishes credibility, we can hypothesize about the factors that may hamper it. Crucial among them is the consistency of the macroeconomic policy framework, where fiscal policy plays a key role. Domestic debt management also matters as the probability of a successful run on the peso increases with the amount of government liabilities that could, in a given period, be exchanged for foreign reserves. In the short term, Mexico may not have other options than further tightening its fiscal and monetary policies. Over the medium term, however, a real peso depreciation appears necessary.

Keywords: Economic Theory&Research; Environmental Economics&Policies; Economic Stabilization; Strategic Debt Management; Banks&Banking Reform (search for similar items in EconPapers)
Date: 1992-01-31
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Citations: View citations in EconPapers (4)

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