1.

Document the trend in Mexico’s key economic indicators, such as the balance of payments,
the exchange rate, and foreign reserve holdings, during the period 1994.1 through 1995.12.

2. Investigate the causes of Mexico’s balance of payments difficulties prior to the peso
devaluation.

It estimates a probit model using 20 macroeconomic, political, and financial

sector indicators. The Results indicate that the significant variables are:

• political instability

• foreign exchange reserves

• domestic credit/GDP

• lending and deposit rate spread

• national savings

• foreign direct investment/GDP.

Evidence further indicates that the signs of the variables are mostly in line with our
expectations, with the exception of inflation, bank reserves / bank assets, export growth, and
lending and deposit rate spread. Based on this analysis, we can conclude that the Mexican

Peso Crisis of 1994-95 was the result of a mix of microeconomic and

macroeconomic factors.

3. Discuss what policy actions might have prevented or mitigated the balance of payments
problem and the subsequent collapse of the peso.

4.Derive lessons from the mexican experience that may be useful for other developing
countries.