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Friday, April 27, 2012 |
Capital flight due to loss of investor confidence: US versus Mexico
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(1) 1987: US |
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| R | CAB | U | ||
| 1986 | 99.6 | -3.3% | 7.0% | |
| Black Monday, Oct.19, 1987: stock market crash: Dow Jones Industrial Average fell by 508 points (23%) | ||||
| 1990 | 85.0 | -1.3% | 5.6% | |
| (2) 1994: Mexico | |||
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1994 | Dec, 1994 | 1995 |
| EMEX ($ per peso) | 0.30 | Mexico abandons its fixed ER |
0.16 |
| CAB ($ billion) | -29.7 | -1.6 | |
| Interest rate (Mex. T-Bill) | 14.1% | 48.4% | |
| Real I (index, 1994=100) | 100 | 84 | |
| Inflation rate (%DP) | 6.9% | 35.0% | |
| Y (index, 1994=100) | 100 | 93 | |
Why did the US economy grow while the economy of
Mexico contracted?
The US let its ER depreciate
Mexico tried to prevent depreciation
| Foreign exchange reserves (billion $) | 1993 | 1994 | % drop |
| Mexico | $25.1B | $6.3B | 75% |
Result: contractionary monetary policy => output contracted