Currency Crises and Collapses (original) (raw)

The Mexican peso crisis: Sudden death or death foretold?

Journal of International Economics, 1996

We argue that allowing for the possibility of a self-fulfilling panic helps to understand 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.

An Analysis of the 2002 Argentine Currency Crisis ∗

2006

In 1991 the Argentine Government embarked on an ambitious exchange rate based stabilization (ERBS) program aimed at removing the enticement of using money creation to finance the pervasive fiscal imbalances that have been a feature of the Argentine economic landscape. Despite the strait-jacket of this program and the early successes achieved, within a decade of its implementation the program collapsed and resulted in the largest debt default in history. This paper analyzes the circumstances leading up to the failure of Argentina’s experiment with this currency board arrangement and the ensuing currency crisis of 2002. In doing so, the paper places this particular episode of exchange rate crisis into the broader context of the three generations of currency crisis models under consideration in the literature. It will be argued that the mixture of unsustainable debt dynamics, an overvalued real exchange rate coupled with labor market rigidities, and the moral hazard presented by the la...

Mexico's Financial Sector Crisis: Propagative Linkages to Devaluation

The Economic Journal, 2000

Furstenberg for helpful comments. The ®ndings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. 1 Garber and Lall (1996) and Folkerts-Landau and Garber (1997) also discuss the role of derivative securities in exchange rate crises and macroeconomic stability. 2 As discussed further in the text, the universal-banking powers of Mexican ®nancial groups would have allowed them in principle to attain a signi®cant degree of diversi®cation through banking, brokerage, underwriting, insurance and leasing activities. Our analysis indicates that much of the devaluation risk was diversi®able. 3 Other suggested contributing factors to Mexico's ®nancial-sector crisis include undercapitalisation, poor supervision and inadequate banking expertise on the part of winning bidders in the privatisation.

The Episodes of Currency Crisis in Latin American and Asian Economies

2001

This volume presents six monographs of currency crisis episodes in two Latin American countries in 1994-1995 (Mexico and Argentine) and four Asian countries in 1997-1998 (Thailand, Malaysia, Indonesia, and Korea). The Asian part of this volume is supplemented with a short comparative note, commenting these four monographs. All the studies were prepared under the research project no. OI44/H02/99/17 on "Analysis

Monetary Policy and Exchange Rates: Guiding Principles for a Sustainable Regime

Social Science Research Network, 2003

During the past three decades, experiments with alternative exchange rate regimes have not been in short supply in Latin America. Mexico typifies this "search for an optimal regime." Since the beginning of its 1987 International Monetary Fund program, Mexico has moved from a peg, to a crawling peg, to a widening band and, after the tequila crisis of 1994, to a flexible exchange rate system. Brazil is another good example. In the 1990s, the country has tried a peg, a crawling band and, in January 1999, moved to a flexible exchange rate system. Both Brazil and Mexico complemented their move toward increased exchange rate flexibility with inflation targeting. Moreover, in the context of one of the deepest financial crises in recent Latin American history, in early 2002 Argentina abandoned its 10-year-old currency board and moved to a managed floating regime. 1