Mexico’s strongbalancestrong-of-payments crisis a chronicle of a death.pdf

JOWlIdOl lNTEit#A~lONAL ECONUMlCS EISEVIER Journal of International Economics 41 (1996) 235-264 Mexico’s balance-of-payments crisis: a chronicle of a death foretold’ Guillermo A. Calvo”, Enrique G. Mendozab’* “Center for International Economics, University of Maryland, College Park, MD 20742, USA “Division of International Finance, Board of Governors of the Federal Reserve System, Washington, DC 20551. USA Received 4 December 1996 Abstract This paper claims that the roots of Mexico’s balance-of-payments crisis are found in the prevailing high degree of capital mobility and financial globalization. Under these circumstances, shifts in foreign capital flows and anticipation of a banking-system bailout may produce large imbalances between stocks of financial assets and foreign reserves, threatening the sustainability of currency pegs. Econometric analysis suggests that half of Mexico’s reserve losses could be accounted for by these phenomena. Large financial imbalances are also fertile ground for self-fulfilling-prophesy crises which lead devaluations