1994 Mexican Currency Crisis

With the mortgage crisis recorded in the United States, the country’s currency declined in value in respect to other world currencies. Increase in money supply led to an increase in the volume of money in circulation in the United States. This led to a rise in prices of goods. Because of this, the value of the dollar declined in the international money markets. The decline in value of the dollar led to imports becoming very expensive. This further reduced the country’s production capability, leading to a further economic decline. A devalued currency makes a country’s exports cheaper than those of other countries. This has the potential of boosting the level of exports in countries with devalued currency thus reducing their balance of

September to November took a huge hit daily on different foreign exchange markets with very volatile market. Government control had a very complex impact on the currency values and continues to do so, leading investors to tread lightly. As the stabilization of growth to support commodity prices has quite improved in the first quarter of 2017. It leads a favorable exposure of commodity producing countries and currencies – which increases the purchasing power measured by the amount of goods that can be purchases with the units of money. The differences in currencies and commodities show that countries do not fall under absolute purchasing power parity and clearly shows that this does not hold in the real-time situations. Absolute purchasing power believes that two countries are completely identical and share the law of one price, meaning that the good is the same price across all countries. Relative purchasing power acknowledges all of the market imperfections that our country is currently enduing and adjusts to the difference in inflation rates so that relative purchasing power can remain unaffected. Currencies, commodities, and inflation are all important factors of the current emerging markets and will continue to change the fluctuations of the market. If the commodity prices continue to improve, it may lead to a more kind market and maybe even leading the Mexican Peso as an attractive investment. Only time will tell where the market takes us, as the United States is faced with administration changes and confused

As a middle-income nation that has for the most part avoided military and political conflict, Mexico should financially be doing much better. In 1994, Mexico joined the Organization for Economic Cooperation and Development (OECD). This organization is comprised of pretty wealthy countries and with Mexico’s induction, the world expected Mexico to improve economically and head in the same direction as the other countries that are part of the OECD. Economically, Mexico had a rough backstory. In 1982, there was a sovereign default which collapsed the currency as well as Mexico’s GDP. This led to many changes in the economy. The government started to withdraw its presence in the economy and embracing global markets. After the default, there were many macroeconomic stabilization issues from which an independent central bank and more developed financial markets emerged. Because of this, Mexico’s economy seemed to be headed upward. The government lowered inflation, controlled its spending, reduced its debt to other countries and increased trade. The only issue with all of this is that there was no economic growth.

October 2008, the Mexican Peso reached a record low, 14.2927, compared to the United States Dollar. Several of the Major Central Banks took the market by surprise with and unexpected Rate, sending traders to sell their publicity in emerging markets. After reaching records high in August, rumors and low liquidity forced the MXN to fall by nearly 20%. The market move accounted for 15%, 8% of that was before the market opened. The Central Bank of Mexico (Banxico) sold $2.5 billion in two days and offered an additional $400 million a day when the peso weakens more than 2 percent. The peso's intraday decline was the biggest since the government abandoned a currency peg in December 1994.

In 1982, Mexico stopped making its payments, Their debt increased from 16 billion to 86 billion in the years between 1975- and 1982 (Claessens and Wijinbergen 967) First, Mexico’s economy showed signs of collapsing after the price of oil dropped due to Iran, an OPEC country, beginning to produce oil again (Watkin paragraph 8). Additionally, interest rates increased due to the fact anti-inflationary policies did not work; as a result, interest rates had doubled from twelve percent to twenty-four percent (Walkin 7). Suddenly, the country found itself in economic turmoil, because their income from oil had run dry, yet the interest rates from loans skyrocketed. Brady Bonds allowed Mexico to repay their debt. Mexican became weary of the government's economic model because it showed signs of weakness (Camp 120). Additionally, Mexican feared the bleak economic conditions in Mexico could led to violence as a result of greater poverty ( Camp

The people of El Salvador have faced many hardships in recent years. From civil war, earthquakes to inhumane living conditions. In return forcing El Salvador to adopt the US dollar. Yet, this adoption wasn’t a move preventing economic decline but rather a move of strength. As stated by Juan Jose Daboub, the finance minister, “Salvador decided to dollarize to armor-plate its economy. It is an integral part of our reforms. [Dollarization] makes the changes permanent. [We have] a low fiscal deficit and a low level of debt. Dollarization reduces interest rates and increases [the economy's] predictability, which is a boost for investment” (Emmott, 2002). Juan Jose Daboub was in fact right about this plan of Dollarization in El Salvador.

Over the next couple of weeks Mexico’s reserves dropped nearly $4 billion, to $121⁄2 billion. The reasons for renewed pressure on the peso in mid-December are unclear. Banco de Mexico cites several factors,  the negative effects of higher real interest rates on financial intermediaries and debtors,  market worries that the current account deficit would be difficult to finance in 1995,  a breakdown in negotiations with the rebels in Chiapas. It is also possible that leaked rumors of changes in exchange rate policy set off another round of capital flight. In any event, over three days Mexico lost another $1.5 billion in reserves.

In August of 1982, Mexico was the first of many Latin American countries to not be able to pay off their loans on the money they borrowed. It began in February of 1982, a sharp decline in international reserves forces Mexico’s government to decrease the value of the peso. This made the dollar-denominated debt burden increase, mostly to the United States commercial banks. With the marked down of the peso, Mexico’s government is not able to stop its loss of reserves and runs out of money. Mexico’s Minister of Finance, Silva Herzog, tells the US government and the International Monetary Fund program, that Mexico is unable to service its external debt of 80

To achieve this goal, I analyzed the Brazil banking sector response to the global financial crisis effect due to the tightening of credit and higher exchange rate. Next, I researched the impacts on the Brazilian economy affecting its imports and exports. Thirdly, impacts on the Brazil’s currency, and lastly a conclusion on the actions and impacts of the Brazil response to the financial crisis. I also include an appendix after the Works Cited that contains images of the

The Mexican peso declined as losses in bonds supported by United States subprime home loans led investors to avoid higher-yielding securities. The peso slid 1.6 % in 2006. Defaults on bonds supported by United States subprime mortgages triggered $80 billion in write-downs and losses at the biggest banks and securities firms that year. In 1990 one U.S. Dollar exchanged on average for 2.8 Mexican pesos. By 2007, the peso had fallen against the dollar by almost 75 %, with an average exchange rate in 2007 of 10.9 pesos per dollar. Mexican products did not become cheaper compared to US products over that 17- year period nor did the price of Mexican products expressed in terms of U.S. Dollars fall by 75% because Mexico had much higher inflation than the United States over that period. In fact, the relative price of U.S. and

The money they spent on imports is more than the money they are taking in from exports, creating an excess supply of pesos. In order to eliminate this, the only way is to buy them back.

This financial crisis was not a sudden event; in fact this crisis has its roots dug deep into the long history of a turbulent Argentine economy. In terms of growth, in the early twentieth centaury, Argentina could boast of outperforming most Latin American nations. More over, as The Economist reports, by 1913 Argentina was among the world’s ten richest countries, ahead of even France and Germany, with an annual average growth of 5% every year over the previous three decades. However, after the First World War, the Argentine economy faced a steep decline and by 1989 the country’s inflation rate went soaring high (Figure 2)

Mexico unilateral changes and NAFTA can be considered complementary explanatory factors. In this model, unilateral changes and NAFTA are treated as exogenous factors. A dummy variable with value one since 1986 to 1998 represent unilateral trade liberalization and a dummy variable with value one since 1994 to 1999 represents NAFTA contribution to liberalization. By these means, the impact of these two changes is compared against the base line of the previous stage (1970-82). Finally, the effect of exchange rate policies is controlled with the variable devaluation of the Mexican peso1. Two alternative measures of devaluation are used, the rate of change of the nominal exchange rate, and a dummy variable with value 1 for years when the rate of change was larger than 50%. Another alternative, not explored here, is to use the real exchange rate. benito@sonoma.edu, http://www.sonoma.edu/people/benito 1 In other studies about growth and trade, authors have used the real exchange rate as explanatory variable. Real exchange rates, however, are not policy variables directly controlled by policy makers. They are indirectly determined. Say, in an Australian type of model the real exchange rate is defined as RER = E. pt/Pn Where RER is the real exchange rate, E is the nominal exchange rate, pt is the world price of tradable goods, and Pn is the domestic price of non-tradable

With the large capital surplus largely arising from foreign investments to support the huge trade deficits in the Mexican current account, all seemed to go well for the Mexican economy until several political crises erupted and several macroeconomics mistakes were left exposed in 1994 which affected foreign investor’s confidence.

I will discuss the merits and demerits of a floating exchange rate, providing the examples of the US Government response to the 2008 financial crisis and the excessive speculation that led to the 1929 stock market crash. These examples will illustrate a time when the US economy benefitted due to a floating exchange rate and a time when the US economy suffered due to a floating exchange rate. I will then provide a similar analysis for the fixed exchange rate using the same example of the dangers of speculation regarding the 1929 financial crash and the emerging market crisis of Argentina in 2001.