The Mexican Peso Crisis: Sudden Death or Death Foretold?

Abstract

We argue that allowing for the possibility of a self-fulfilling panic helps understand several features of the recent Mexican crisis. Self-fulfilling expectations became decisive in generating a panic only after the government ran down gross reserves and ran up short-term dollar debt. We present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt, but not for others.MEXICO;MONEY;CURRENCIES;MONETARY POLICY;EXCHANGE RATE