This study identifies the main factors that explain the recovery of the Mexican economy after the currency crisis of 1995. A growth decomposition exercise shows that export growth mitigated somewhat the effect of the crisis in 1995, but contributed only modestly to the recovery afterwards. Evidence for Indonesia, Korea, and Thailand also show that fixed investment explained a substantial portion of the reduction in economic growth during their recent crises. Econometric results show that fixed investment fell precipitously in 1995 as a result of both the negative income effect and the increase in the cost of capital caused by the sharp depreciation of the currency. The authors found support for the view that access to the U.S. financial market was a key feature of the recovery after 1995. A policy implication that emerges from the analysis is that, for countries like Mexico, currency depreciation appears as a better policy response to speculative attacks than interest rate defenses of overvalued currency levels.
Details
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Author
Lederman,Daniel, Menendez Jaramillo,Ana Maria, Perry,Guillermo, Stiglitz,Joseph E.
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Document Date
2000/04/11
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Document Type
Working Paper
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Report Number
28951
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2010/07/01
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Doc Name
Mexico: five years after the crisis
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Keywords
Financial market; Currency; Fixed investment; Export growth; Interest rates; Exchange rate
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Citation
Lederman,Daniel Menendez Jaramillo,Ana Maria Perry,Guillermo Stiglitz,Joseph E.
Mexico: five years after the crisis (English). Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/920211468777294386/Mexico-five-years-after-the-crisis