remaining reserves – in one day. Judging by their public economic plans, the Mexican authorities had in mind an exchange rate of 4.07 pesos to the dollar, a 14 percent devaluation from the earlier 3.50 floor. But with confidence imploding, the peso dropped immediately to 5.80, a 40 percent devaluation
Case Questions 1 Normally, economists suggest that exchange rate pegging by developing countries such as Mexico ought to be a temporary stabilization tool, ultimately followed by a managed float, a crawling band, or a floating exchange rate system. Briefly define each of these three exchange regimes. 2 Approximately $24 billion had fled Mexico in a run on the peso between April 1 and December 21, 1994. What is capital flight? How does it differ from capital flows? What were the major causes of capital flight in Mexico? 3 Explain the Mexican rescue package of $50 billion arranged by the USA and the International Monetary Fund to avert a broader financial crisis. 4 In making this unusual commitment (a $50 billion rescue package), was the world unintentionally rewarding Mexican mismanagement? What was to keep the same problems from causing another financial crisis that would require another rescue plan in the future? 5 Given all of Mexico’s problems, how risky was the US $20 billion aid package?
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- Winter '20
- Mexican peso, Carlos Salinas de Gortari, 1994 economic crisis in Mexico