Central banking

1. Topic:
Mexico Currency Crisis

2. The 1994-95 Crisis
These crisis is also known as “Tequila Crisis”
Over 1987-93 the maxican peso appreciated against the
U.S dollar. Using consumer price indices from two
countaries to calculate the real exchange rate.
The value of the peso rose by 46% compared with dollar

3. Real appreciation of Peso 1987-94
Years P/D e/r Mexican CPI U.S CPI Real E/R
1987 2.2 100 100 100
1988 2.2 149 104 72
1989 2.6 180 109 73
1990 2.9 243 116 64
1991 3.0 273 119 61
1992 3.1 304 122 57
1993 3.1 329 126 54
1994 3.4 351 129 57

4. Over this period the Mexican government letting the
peso value decline at a slower rate than the different
inflation rates to lowering the inflation.
Yet the Banco de Mexico had no trouble in maintaining
the value of the Peso. The Banco de Mexico
accumulated reserve every year from 1988-1993 with
reserve increasing by $8.0 billion.

5. Unfortunately the situation change in 1994
Political Instability
Rising U.S interest rates
Upcoming elections
Foreign investment

6. Later the administration of the president Carlos made
three decision to proved the later events.
In maintaining the value of Peso, it lost most of the
Mexico foreign reserve.
At the same time the Mexicans and foreigners were
selling pesos for dollars, Banco de Mexico reissuing
pesos that it received.
President administration refinanced the Mexico
government debt during 1994, it allow the debt to
become short term.

7. On December 20,
Mexican government announced to move Peso against
the dollar.
On currency market the value of the peso fell to the
floor.
After two days Mexican government announced Banco
de Mexico no longer support to Peso.

8. After government announcement
Foreign investment decrease due to political un
certainty and raise interest rate in U.S.A.
Mexican authority did not react soon in reaction to
decline foreign investment.
Then peso devalued further and touching into the
currency crisis in the Mexico

9. Conclusion:
The simple explanation of this collaps was that the
peso had become the over valued during the period
1987-94 as shown in table.
Banco de Mexico spent most of its dollar in
supporting the peso, and when it ran out of reserve the
value of the peso start falling.
This was the result of the both political and economic
system with sequence of risky financial policy followed
by government.