
Contents
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7.1. Introduction 7.1. Introduction
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7.2. The Apparently Golden Years, 1988 to Early 1994 7.2. The Apparently Golden Years, 1988 to Early 1994
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7.3. February-December 1994: the Clouds Darken 7.3. February-December 1994: the Clouds Darken
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7.4. The Massive Financial Crisis Explodes 7.4. The Massive Financial Crisis Explodes
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7.5. Conclusions and Policy Implications 7.5. Conclusions and Policy Implications
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7 Causes and Lessons of the Mexican Peso Crisis
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Published:February 2001
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Abstract
The Managing Director of the IMF deemed the crisis faced by the Mexican peso in December 1994 as the ‘first major crisis of the 21st century’. Analyzing the Mexican peso crisis reveals that it was brought about by several different factors that include the large scale of deficits in the current account, how these deficits were funded by short-term capital inflows, how the Mexican authorities asserted a relatively fixed nominal exchange rate that was seemingly overvalued to reduce inflation, and the outwardly relaxed monetary policy imposed during 1994. The causes also include how the government allowed the transformation of a huge part of this debt into dollar-dominated paper, how devaluation was mismanaged, and, lastly, how criminal and political events have emerged during this period. This chapter takes on a chronological approach in analyzing this crisis and concentrates on issues of devaluation and imperfections within the capital market.
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