This paper analyses the causes of the 1994 Mexican peso crisis. Consensus is emerging that the large current account deficit, largely funded by short-term capital inflows, was one of the main factors underlying the crisis.
The study concludes that two other factors were also important – the speed of market liberalisation in Mexico, and imperfections in international capital markets, which can lead to huge over-reactions to relatively small changes in countries’ economic fundamentals. OUT OF PRINT