Discussion Paper Details

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Title: The Macroeconomics of the Mexican Crisis: A Simple Two-period Model

Author(s): Gregor Irwin and David Vines

Publication Date: September 1995

Keyword(s): Capital Inflow, Exchange Rate Crisis, Macroeconomic Stabilization and Mexico

Programme Area(s): International Macroeconomics

Abstract: We analyse the events leading to the devaluation of the Mexican peso last year, using a simple two-period model. We view the problem as a race between a foreign investment led demand boom and the potential expansion in supply which might follow; the outcome of such a race is inherently uncertain. If, in an exchange rate based stabilization programme, supply does not keep pace with demand, competitiveness problems will eventually result in lower output, and consequently the government might be tempted to devalue. In Mexico it would also appear that the costs and benefits of maintaining the regime were adversely affected by a reduction in the amount of external financing available.

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Bibliographic Reference

Irwin, G and Vines, D. 1995. 'The Macroeconomics of the Mexican Crisis: A Simple Two-period Model'. London, Centre for Economic Policy Research.