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A number of currency crises have affected certain countries, which have also resulted in contagion in the sense that the crises affected neighboring countries. In a critical essay, select a country...

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A number of currency crises have affected certain countries, which have also resulted in contagion in the sense that the crises affected neighboring countries. In a critical essay, select a country (or countries) affected by a specific currency crisis. Analyze the source of the crisis and the specific resolution of the issue. Indicate whether the International Monetary Fund (IMF) or another sovereign state or country provided intervention. Has the country's economy recovered since the conclusion of the crisis? Support your findings with additional academic references.


  • Your essay should be at minimum 10-pages in length, not including the title and reference pages.
  • Support your submission with course material concepts, principles and theories from the textbook and at least three scholarly, peer-reviewed journal articles. Use the Saudi Digital Library to find your resources.
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Answered Same Day Dec 13, 2019


David answered on Dec 24 2019
145 Votes
Contagion Cu
ency Crisis
Table of Contents
Introduction    3
Mexico Cu
ency crisis reasons    3
Latin America and impact of cu
ency crisis    6
Resolution of the cu
ency crisis    9
Conclusion    10
References    12
The report aims to analyze the cu
ency crisis of Mexico and its impact on Latin Mexican countries. The sources of crisis as well as the specific resolution to the cu
ency crisis is analyzed and explained. The intervention of international monetary fund or other countries in the cu
ency crisis is also explored.
Mexico cu
ency crisis reasons
The Mexican crisis has taken place on December 1994. It is critical to understand the reasons of Mexican cu
ency crisis. The consensus of people and scholars reached to one point and that was cu
ent account deficit of the Mexico that reached almost 8 percent of country’s GDP in 1993 and 1994. Another consensus about the cu
ency crisis was short term capital inflows that caused the crisis. Experts also included commitment of Mexican government to have a relatively fixed exchange rate. The notion held by government that over valued exchange rate would reduce inflation rate was also found as a reason for Mexican crisis. Another reason was lax monetary policy adopted by government that was pursued in 1994. The causes of Mexican crisis revealed that there was a high proportion of government debt paper for short term and in the hands of non residents. In the 1994, government had allowed large part of government debt into the dollar denominated paper.
Mexican economists attributed the crisis due to mishandling of devaluation. Unexpected economic and political events were also found to play an important role for cu
ency crisis. According to Banco de Mexico, the plot was inevitable due to the criminal and political events that took place unpredictably (Buira, 1996).
One more factor that was taken into consideration for crisis was process of rapid liberalization that was not sustained by Mexican government and its financial sector. The large changes should not have been rapid and liberalization should have been slowed down as argued by the critics of Mexican cu
ency crisis. Findings revealed that the process of intense liberalization and process of re-privatization of banks, changes in monetary and credit policy that lifted the constraint on credit expansion caused the cu
ency crisis because there were no sufficient supervision and regulations over banks activities. The government at that time did not even consider applying some measures to constrain credit growth to consumers because it was considered as inappropriate against the liberal stance of government to manage credit and monetary policy.
This pattern of very rapid deregulating of capital account and financial sector with expansions on macroeconomic management actually resulted in financial crisis in other countries was not noted by Mexican government.
Another set of elements that were identified as responsible for Mexican cu
ency crisis was international capital market that consisted of some imperfection. This imperfection caused over investment or underinvestment in certain market but whenever the sentiments of investors perceived over investment in country, there was a huge reaction where inflows declined sharply and became negatively.
The reason of turning over optimism into over pessimism and sharp withdrawal of money was due to fund manager behavior. The second factor was unavailability of in depth information about market to take rationale decision by investors and this caused investors to withdraw the money out of market. Third factor that was found for such reaction from investors was the conflict of interests that were shown between the role of investment bankers and investment banks own interests to maintain their assets value. The fourth factor for such intense reaction from the investor was role of institutions such as mutual funds that tried to capture market by highlighting high yields and downplaying the associated risk factor.
There was important alteration in USA monetary policy that led to unexpected political and dramatic development in Mexico and thus diminished the attractiveness of country for foreign investors. At that time, Mexico did not tighten its monetary policy to diminish the large cu
ent account deficit and increase the differential premium to gain benefits. Government did not take this action and it is believed by Leiderman and Thorne, (1995) that this action could have averted cu
ency crisis.
The dramatic shift caused investors to invest only in dollar denominated paper and this was done by Mexican authorities with bearing of exchange rate risk. By the mid 1994, Tesobonos that was offering dollar denominated government debt for very short term became the prefe
ed option for investors. The Mexican authorities did not able to deflate the value of debt because it was dollar denominated. All these factors made the situation of cu
ency crisis grave.
Further the confusion by the Mexican authorities that political conditions impact was transitory by seeing the capital market inflows was a major cause for this crisis to happen. In this case, the Mexican authorities ignored the rule of John...

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