The Unforgiving ‘Market’ and the Tequilazo
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Mexico’s financial débâcle and its impact on other emerging markets (the ‘Tequila effect’) has raised many fundamental questions. Mexico achieved fiscal balance in 1993, undertook several fundamental market-oriented reforms, signed a free trade agreement with a very large market (the NAFTA), became a member of the OECD, and was hailed by international institutions as a paramount example of successful reform. Yet the 1994 devaluation of 20 December brought the economy down like a house of cards. Output fell by more than 7 per cent in 1995, the current account deficit sharply swung from about 8 per cent of GDP in 1994 to zero and investors turned their noses away from high-yield Mexican public debt, even though the international community had pledged about $50 billion in a rescue package. In addition, Mexican problems quickly spread around the world’s emerging markets, including those exhibiting long and enviable track records.
KeywordsExchange Rate Central Bank Current Account Real Exchange Rate Current Account Deficit
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