Front Matter Page
Research Department
Contents
Summary
I. Introduction
II. Fiscal Deficits and Long-Run Equilibrium Rates of Inflation
1. The real interest rate
2. The rate of inflation in a long-run equilbrium
III. 1978-1982: Unsustainable Public Sector Deficits and Balance of Payments Crisis
1. Unsustainable public sector deficits
2. Capital flight and balance of payments crisis
IV. 1983-1987: Fiscal Adjustment, Domestic Debt and the Persistence of Inflation
1. 1983-1984: The shift from foreign to domestic debt
2. 1985-1986: Adverse shocks, capital flight and the renewal of inflationary pressures
3. 1987: Wage indexation and the persistence of inflation
V. 1988-1991: The Dynamics of a Successful Stabilization Program
1. Credibility and the persistence of high real interest rates
2. The policy response: overshooting of the primary surplus and of the depreciation of the Mexican peso
VI. Conclusions Figures
Figures
Figure 1. Interest Rate Differentials vs. Exchange Rate Depreciation
Figure 2. Ratio of Inflation Rates between Controlled and Non-controlled Items
References
Table 1. Mexico: Fiscal Deficits and Real Interest Rates, 1978-1990
Table 2. Mexico: Inflation Rates, 1978-1990
Table 3. Mexico: Public Sector Deficit and its Financing, 1978-1982
Table 4. Mexico: Depreciation of the Exchange Rate
Table 5. Mexico: External Debt and Resource Transfer
Appendix I
Table Al. Real Interest Rates in Mexico
Appendix II. Derivation of the Steady-State Requirement
Summary
The interrelationship between fiscal, monetary, and exchange rate policies in Mexico from the late 1970s to mid-1991 is examined for the purpose of critically evaluating the consistency of the macroeconomic policies that were undertaken since the emergence of the debt crisis in 1982 and of analyzing key policy issues that arose during the subsequent stabilization efforts.
A major finding is that the interaction between the actual implementation of economic policies and economic perceptions about the sustain-ability of those policies played a central role in the dynamics of major macroeconomic variables since 1982. In particular, the paper shows how concerns of economic agents about the sustainability of stabilization programs increased the cost of adjustment by requiring tighter stabilization policies. Indeed, the analysis suggests that the restoration of credibility evident since 1989 was associated with adjustments in the fiscal, monetary, and exchange rate variables greater than those consistent with price stability in the long run.