TY  - JOUR
AU  - Sachs,Jeffrey
AU  - Tornell,Aaron
AU  - Velasco,Andres
TI  - The Mexican Peso Crisis: Sudden Death or Death Foretold?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5563
PY  - 1996
Y2  - May 1996
UR  - http://www.nber.org/papers/w5563
L1  - http://www.nber.org/papers/w5563.pdf
N1  - Author contact info:
Jeffrey D. Sachs
The Earth Institute at Columbia University
314 Low Library
535 West 116th Street, MC 4327
New York, NY  10027
Tel: 212/854-8704
Fax: 212/854-8702
E-Mail: sachs@columbia.edu

Aaron Tornell
Department of Economics
UCLA
405 Hilgard Ave, Bunche Hall #8283
Los Angeles, CA  90095-1477
Tel: 310/794-1686
Fax: 310/825-9528
E-Mail: tornell@econ.ucla.edu

Andres Velasco
Columbia University
School of International and Public Affairs
420 West 118th Street
New York, NY 10027
Tel: 212/854-3899
E-Mail: avbranes@gmail.com
AB  - 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.
ER  -