Year: 1996
Type: report
Abstract: The Mexican peso crisis of December 1994 sent shock waves through the world's financial and policy communities. What is to some extent surprising is not that the Mexican economy faced a major currency crisis, but that so many analysts and observers were shocked by this turn of events. Mexico had a remarkable historical precedent: merely a dozen years earlier Chile suffered a prophetically similar crisis. Like Mexico during the 1980s, Chile during the 1970s undertook major structural reforms characterized by a drastic opening of the economy, a sweeping privatization program and a major deregu- lation effort aimed at creating a modern financial sector. In Chile, as in Mexico more than a decade later, the use of a predetermined exchange rate to eliminate inflation, combined with very large capital inflows that were intermediated by a weak banking system, generated a situation of exchange- rate overvaluation, a vulnerable financial sector and eventually the collapse of the currency. This paper provides a comparative analysis of some macroeconomic aspects of the Chilean and Mexican crises and discusses the extent to which exchange-rate-based stabilization programs are successful in reducing or even eliminating inflationary inertia? The paper provides a brief overview of the Chilean and Mexican reform and stabilization programs started in 1975 and 1985. I develop a theoretical model on the effects of exchange- rate-based stabilization programs on inflationary inertia. The model emphasizes the roles of government preferences and credibility. I use detailed data on Chile and Mexico to assess whether these programs affected the time series properties of inflation; more specifically, I investigate whether they reduced inflationary inertia.
DOI: 10.3386/w5794
Author: Sebastian Edwards
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1545976587