V. Hugo Juan-Ramón


V. Hugo Juan-Ramón


V. Hugo Juan-Ramón

During the late 1980s and early 1990s Mexico enjoyed strong capital inflows in response to an effective stabilization program, privatizations, structural reforms, and the Brady Plan. In 1994, in reaction to an increase in interest rates abroad and domestic political strife, capital began to flow out of the country and a financial crisis erupted on December 20, 1994. In response, Mexico adopted a floating exchange rate regime; prevented a collapse in the payments system; and implemented reforms to the pension system, and to the banking, fiscal, and external sectors. This article provides an overview of selected research conducted by the IMF staff on Mexico since the time of the crisis.

What were the factors behind the Mexican financial crisis? This question constitutes the theme of two papers—Savastano, Roldós, and Santaella (1995); and Masson and Agénor (1996).1 The first article discusses three complementary views of the crisis: the adverse shocks view, the unsustainable external position view, and the policy-slippages view. The second article, which concentrates on credibility, asserts that investors appear to have seriously underestimated the risk of devaluation, despite early warning signals. Similarly, other literature, such as Ötker and Pazarba¸sioglu (1997) argue that the decline in foreign reserves and the increase in the share of short-term, foreign-currency-indexed debt seem to be the main factors explaining the timing of the Mexican crisis.2

Kalter and Ribas (1999) analyze the Mexican crisis with a focus on the role of expanding government operations, within the context of a quasi-fixed nominal exchange rate, in reducing the relative price of traded goods.3 Increases in government expenditures and taxation is associated with increased production costs, excess demand for nontraded goods, and a deterioration in the financial health of the traded goods sector. Becker, Gelos, and Richards (2000), using company-level data in Mexico during 199495, find that although interest rates failed to show a clear confidence loss in the exchange rate regime, the relative performance of net exporters suggests that expectations of devaluation increased continuously.4

As Mexico changed its exchange rate/monetary policy strategy after the crisis, IMF research shifted toward other key issues. Edwards and Savastano (1998) inquire whether during 199597 the peso-dollar exchange rate behaved in a manner compatible with a floating exchange rate regime.5 Their econometric analysis suggests that Mexico’s exchange rate behavior has been largely consistent with that of (quasi) floating rates; and that during that period the Bank of Mexico (BOM) took into account exchange rate developments for conducting monetary policy.

As for monetary policy, issues such as the duration of the lags from instruments to targets, the main transmission mechanism, and the identification of shocks, which had been absent from the Latin American debate, became relevant for Mexico.6 Juan-Ramón (1996), and Aguilar and Juan-Ramón (1997) analyze these issues; they describe the daily conduct of monetary policy since September 1995 when the BOM started using a system of cumulative balances with commercial banks as an operational target. Using daily data from September 1995 to December 1996, both articles find that most liquidity shocks originated on the demand side, and that the BOM signaled to the market its desired monetary policy stance by announcing small changes in its operating target, which, in turn, promptly affected short-term interest rates in the desired direction. Castellanos (2000), a researcher at the BOM, using daily data from January 1996 to January 2000, confirms this first channel of transmission but also finds some instability in interest rate responses after June 1998.

The sizable devaluation, the sharp increase in interest rates, and the abrupt downturn of the economy in the aftermath of the crisis created serious liquidity and solvency problems for the banking sector. IMF research indicated that the Mexican banking crisis manifested on the asset side but did not cause a run on the system’s deposits; however, it did lead to a flight from quality. Relatively sounder banks decided to reduce their cost of funding relative to other banks, while problem banks increased their share of deposits because of the higher interest rate paid and the government deposit guarantees. Developments in the Mexican banking sector have been the subject of ongoing research at the IMF. González-Hermosillo, Pazarba¸sioglu, and Billings (1997) use the case of Mexico to show that bank-specific variables and contagion effects explain the likelihood of bank failure, while macroeconomic variables largely determine the timing of bank failures; and González-Hermosillo (1999) empirically analyzes the contribution of microeconomic and macroeconomic factors in five recent episodes of systemic banking problems, including Mexico in 199495.7

Even before the crisis, policymakers and IMF staff were concerned by the disappointing performance of Mexico’s per capita growth (see, e.g., Loser and Kalter, 1992). IMF research concluded that Mexico would improve national growth by following the well-established policy framework of macroeconomic stability, improving human capital and the functioning of the judicial system, and deepening structural reforms. Juan-Ramón and Rivera-Batíz (1996) analyze regional growth and find convergence of real per capita GDP in Mexico’s states and regions during the periods of higher average national per capita growth (197085), and divergence during the lower-growth period (198593).8

The postcrisis resumption of capital inflows in Mexico has caused a market-driven real appreciation of the peso, raising concerns about Mexico’s external competitiveness. In this connection, Dabós and Juan-Ramón (2000) study the long-run behavior of the relative price of Mexican exports to nontraded goods. Gelos and Werner (1999) study the role of financial liberalization, credit constraints, and collateral in investment in the Mexican manufacturing sector; and Gelos and Isgut (1999) examine capital adjustment patterns in the manufacturing sector of Colombia and Mexico.9


Miguel A. Savastano, Jorge Roldós, and Julio Santaella, “Factors Behind the Financial Crisis in Mexico,” in World Economic Outlook, May 1995, World Economic and Financial Surveys (Washington: IMF, 1995), Annex I; Paul R. Masson and Pierre-Richard Agénor, “The Mexican Peso Crises: Overview and Analysis of Credibility Factors,” IMF Working Paper 96/6, 1996; Alejandro M. Werner, “Mexico’s Currency Risk Premia in 1992-94: A Closer Look at the Interest Rate Differentials,” IMF Working Paper 96/41, 1996; Alejandro M. Werner, “Target Zones and Realignment Expectations: The Israeli and Mexican Experiences,” IMF Staff Papers, Vol. 7, Supp. 1, 1995.


Inci Ötker and Ceyla Pazarba¸sioglu, “Likelihood Versus Timing of Speculative Attacks: A Case Study of Mexico,” European Economic Review, Vol. 41, No. 3 (April), 1997; Inci Ötker and Ceyla Pazarba¸sioglu, “Speculative Attacks and Currency Crises: The Mexican Experience,” Open Economies Review, Vol. 7, Supp. 1, 1996.


Eliot R. Kalter and Armando P. Ribas, “The 1994 Mexican Economic Crisis: The Role of Government Expenditure and Relative Prices,” IMF Working Paper 99/160, 1999; Andrew Feltenstein and Juming Ha, “An Analysis of the Optimal Provision of Public Infrastructure: A Computational Model Using Mexican Data,” IMF Working Paper 96/13, 1996.


Torbjorn Becker, Gaston R. Gelos, and Anthony Richards, “Devaluation Expectations and the Stock Market: The Case of Mexico in 1994/95,” IMF Working Paper 00/28, 2000.


Sebastian Edwards and Miguel A. Savastano, “The Morning After: The Mexican Peso in the Aftermath of the 1994 Currency Crisis,” National Bureau of Economic Research Working Paper No. 6516, April 1998.


Alejandro Aguilar and V. Hugo Juan-Ramón, “Determinantes de las Tasas de Interés de Corto Plazo en México: Efecto de las Señales del Banco Central,” Gaceta de Economía, Año 3, Núm. 5, 1997, pp. 209-20; Sara Gabriela Castellanos, “El Effecto del ‘Corto’ Sobre la Estructura de Tasas de Interes,” Bank of Mexico, Research Document 2000-01, June 2000; V. Hugo Juan-Ramón, “The Daily Conduct of Monetary Policy in Mexico” (unpublished; Washington: IMF, 1996); May Khamis and Alfredo M. Leone, “Can Currency Demand Be Stable Under a Financial Crises? The Case of Mexico,” IMF Working Paper 99/53, 1999.


Brenda González-Hermosillo, “Determinants of Ex-Ante Banking System Distress: A Macro-Micro Empirical Exploration,” Working Paper 99/33, 1999; Brenda González-Hermosillo, Ceyla Pazarba¸sioglu, and Robert Billings, “Banking System Fragility: Likelihood Versus Timing of Failure: An Application to the Mexican Financial Crisis,” IMF Staff Papers, September 1997; Brenda González-Hermosillo, Ceyla Pazarba¸sioglu, and Robert Billings, “Determinants of Banking Sector Fragility: A Case Study of Mexico,” IMF Staff Papers, September 1997; David Andrews and Shogo Ishii, “The Mexican Financial Crises: A Test of the Resilience of the Markets for Developing Country Securities,” IMF Working Paper 95/132, 1995.


Claudio Loser and Eliot Kalter, eds., Mexico: The Strategy to Achieve Sustained Economic Growth, IMF Occasional Paper No. 99, 1992; V. Hugo Juan-Ramón and Luis A. Rivera-Batíz, “Regional Growth in Mexico: 1970-93,” IMF Working Paper 96/92, 1996.


Marcelo Dabós, and V. Hugo Juan-Ramón, “Real Exchange Rate Response to Capital Flows in Mexico: An Empirical Analysis,” IMF Working Paper 00/108, 2000; Gastón R. Gelos and Alberto Isgut, “Fixed Capital Adjustment: Is Latin America Different? Evidence from the Colombian and Mexican Manufacturing Sector,” IMF Working Paper 99/59, 1999; Gastón R. Gelos and Alejandro M. Werner, “Financial Liberalization, Credit Constraints, and Collateral: Investment in the Mexican Manufacturing Sector,” IMF Working Paper 99/25, 1999; Pierre-Richard Agénor and Alexander W. Hoffmaister, “Capital Inflows and the Real Exchange Rate: Analytical Framework and Econometric Evidence,” IMF Working Paper 96/137, 1996; Julio A. Santaella and Abraham E. Vela, “The Mexican Disinflation Program: An Exchange Rate-Based Stabilization,” IMF Working Paper 96/24, 1996.