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what are the main causes of Mexicos pesos crisis of 1994 , also know as the...

what are the main causes of Mexicos pesos crisis of 1994 , also know as the Tequila crisis

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Answer #1

A variety of factors are forming around the causes of the Mexican peso crisis-and its scope-consensus. These include the large scale of the current account deficit, which in 1993 and 1994 had exceeded nearly 8 percent of GDP, as well as the fact that relatively short-term capital inflows financed a significant part of this deficit. These also include the dedication of the Mexican authorities to a relatively fixed (nominal) exchange rate and the fact that a somewhat overvalued exchange rate was accepted by a government committed to very rapidly increasing inflation.

These also include, as reserves fell sharply, the rather loose monetary policy followed in 1994. The reasons include the fact that such a high proportion of government debt paper was so short-term, such a high proportion in the hands of non-residents, and that the government had allowed a large part of its government debt to be turned into dollar-denominated paper during 1994. Also, among the causes highlighted-especially by Mexican economists-is the devaluation's' mishandling,' the so-called' December errors.' Last but not least, it is seen that unforeseen extra-economic (political) activities played an important role in triggering the crisis.

Although all of these causes obviously provide a very significant part of the explanation of the peso crisis-and its extent-it would seem that the may literature on the Mexican crisis has either ignored other sets of factors, which were also relevant. Second, it could be argued that the liberalization process which took place in Mexico in the early 1990s in the financial sector and in the capital account was perhaps too fast and–above all–that too many adjustments took place concurrently for the economic system to adapt adequately to so many major changes at the same time, as well as to cope with a large increase in capital inflows.

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