NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Mexican Peso Crisis: Sudden Death or Death Foretold?

Jeffrey Sachs, Aaron Tornell, Andres Velasco

NBER Working Paper No. 5563
Issued in May 1996
NBER Program(s):   IFM

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.

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Document Object Identifier (DOI): 10.3386/w5563

Published: 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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