Friday, April 27, 2012 |
Capital flight due to loss of investor confidence: US versus Mexico
(1) 1987: US |
||||
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 | |||
|
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