Jim Whitney Economics 311

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