The Mexican Peso Crisis

Download or read book The Mexican Peso Crisis written by Mr.Paul R. Masson and published by International Monetary Fund. This book was released on 1996-01-01 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines credibility and reputational factors in explaining the December 1994 crisis of the Mexican peso. After reviewing events leading to the crisis, a model emphasizing the inflation-competitiveness trade-off is presented to explain the formation of devaluation expectations. Estimation results indicate that investors appear to have seriously underestimated the risk of devaluation, despite early warning signals. The collapse of confidence that followed the December 20 devaluation may have been the result of a shift in the perceived commitment of the authorities to exchange rate stability.