The Mexican peso crisis: comment on Meigs

Article Abstract:

James Meig argues that Mexico would not have suffered a peso crisis in 1994 to 1995 if floating exchange rates had been used, and devaluation was inevitable with a pegged rate. The experience of Mexico after 1994 shows that there were other factors such as inconsistent public policy combined with global capital flows. Bad policy can lead to exchange rate volatility whether or not rates are pegged or floating. There were mixed signals from the government in 1995 and the peso weakened sharply. Meig is right, however, in assertng that parity should be left alone.

Economic policy

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Mexican monetary lessons

Article Abstract:

Mexico suffered an exchange rate crisis from 1994 to 1995 which could have been avoided if market-determined rates of exchange had been used rather than pegged rates. The peg was thought to provide protection against inflation and exchange rate risks, and there were some short-term benefits, but there were also unforeseen costs. A serious drawback was that the dollar/peso rate could not be adjusted when demand for Mexican capital assets rose from 1990 and 1993. Interest rates and prices that had been suppressed rose rapidly after the peso was devalued.

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Lessons for Asia from Mexico

Article Abstract:

The Asian financial crisis in 1997 can be understood in the light of lessons learned from the similar crisis that hit Mexico in 1994. While the Asian crisis took all economists by surprise, the Mexican crisis had been foreseen by a few economists who knew of the dangers of a pegged foreign exchange rate. However, the forebodings of these handful of economists were ignored. Policymakers preferred to hear the illusory assumptions that equate suppression of inflation with fixing the Mexican peso/American dollar exchange rate.

Analysis, Foreign exchange, Asia, Economic forecasting, Depressions, Economic depressions

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