Question

What were the main root causes of Mexico's 1994-1995 "Tequila Crisis"? Where the root causes due to market failure or government failure? How did market or government failure play a role in the "Tequila Crisis"? How did the government react to the this crisis? What was the response from the government after the crisis?

Answer 1

Tequila crisis refers to the currency crisis sparked by the Mexican government's decision to devalue the Mexican peso against U.S dollars in December 1994. The crisis took place due to the devaluation of peso between 13 to 15 percent and the decision of the central bank to increase the interest rate resulting in short-term interest rate rising by about 32 percent. Political instability within the country was also a reason for the crisis. The root cause of the crisis was the incompetent fiscal and monetary policy. The government and the central bank failed to respond with suitable policy. Mexico came out of the crisis with the help of bailout package provided by the U.S and additional assistance provided by IMF.