Professional Documents
Culture Documents
Privatization of
Government Enterprises.
ber
By
D
199 ecem
4
At
the
en
d
of
19
93
Years Leading Up To
The Crisis
Mexican real
exchange
rate
appreciated
by around
30%
Exchange
rate went
from xed to
a crawling
peg and then
to an
adjustable
band
Appreciation
continued
and was
exacerbated
by the large
capital
inows.
94
1980's- Peso
denominated
government
securities were
sold only to
Mexican
residents.
1990- The
Government
allowed direct
sales to foreign
residents.
Purchases rose
rapidly, totaling
over US$18
billion, during
1991-93.
199
0
8%
8%
199
3
57%
57%
Primary
Reason
Funded by
the rapidly
growing
net capital
ows.
CADapproximately the
same percentage
as during the
1982 debt crisis
Governmen
t simply
neglected
this
Excess
demand in the
economy
Increase in
imports.
Majorly
constituted
Sufficient by the Private
cash reserves
Sector
instead of the
Public sector
CHIL
L
Excess of
Private
Investment
over Private
savings
undermine
d its
commitmen
t to
maintaining
a stable
exchange
rate the
basis of its
success in
attracting
foreign
capital.
strong
commitmen
t to reduce
rapid
ination.
WHY?
Retain
foreign
investmen
ts.
reduction in
the interest
cost of debt
(6 to 8%)
http://www.galbithink.org/topics/mex/pbond.h
tm
Uncertainty among
investors
Series of assassinations of political
leaders that time rebellion in the southern province armed uprising only seven months
before a presidential election
ruling partys presidential candidate,
Luis Donaldo Colosio, was
assassinated on March 2
kidnapping of a prominent Mexican
businessman, Alfredo Harp
Ruiz-Massieu's assassination,
governor, Guerrero
At this point, the government decided to
devalue the peso 15 percent, to about
four pesos per dollar. However, within
days Mexico abandoned the new peg and
the peso plummeted, sinking the country
into a nancial crisis
Bailout
The government
got a bailout from
US , International
monetary fund ,
BIS and other
nations . The total
bailout was of
approx. $50 billion
USA
BIS
11
10 20
17.8
Canada
IMF
Latin
american
countries
Contractionary
monetary policy
Money supply was reduced by the following measures
Strict reserve requirements were imposed
Limit on expansion of net domestic credit
Effects on IS-LM-BP equilibrium
LM shifts to the left as money supply decreases in the economy .
There is a surplus in the balance of payments. The exchange rate
falls to clear the foreign exchange market. Imports increase and BP
curve shifts to the left.
Fall in exchange rate also decreases the Aggregate Demand and
shifts the IS curve to the left.
New equilibrium is formed with a higher interest rate , a lower
income and a lower exchange rate.
Contractionary Fiscal
policy
Expenditures by public sector were reduced by 10%
Effects on IS-LM-BP
The IS shifts to the left as aggregate demand is decreased
Case 1 ( LM steeper than BP)
There is a balance of payment decit due to increased Foreign capital
outow and increased imports . The exchange rate rises . This shifts
the BP curve to the right.
The rise in exchange rate causes the IS curve to shift to the right as the
aggregate demand increases. This offsets some of the impact of the
Contractionary scal policy
Case 2 : ( BP steeper than LM)
There is a balance of payment surplus due to increased foreign capital
inow and decreased imports. Exchange rate falls . The BP curve shifts
to the left.
The fall in exchange rate also shifts the IS curve further left increasing
the effect of contractionary scal policy
In both the cases , the new equilibrium will be formed at a lower interest
rate and income .
Hence, If the Mexican ination rate minus the U.S. ination rate
exceeds the rate of depreciation of the pesothat is, if
then the real exchange rate rises and Mexican goods became more
expensive in terms of U.S. goods; the peso becomes over valued.
The real value of the peso for Mexicos trade depended not
only on its value vs. the dollar, but also on its value vs.
Mexicos other trading partners, and therefore they
suggest that multilateral measure of the real exchange rate
is more appropriate.
decreasing Mexican
of investment in Mexico.