Crisis is something inevitable. Every country in the world tries to decide the best economic policy to ensure that their economy is still in stabil condition. However, even if there are a lot of preventive measures done by government of a country, the possibility of crisis is there. That is why, we have to learn more and more how to prevent or even close channel of crisis to happen.
In crisis time, Foreign exchange rate of a currency is crucial and influencial to be watched. Because it can easily fluctuate in time of crisis. Businessman, government, and all investors are the ones who always watched the fluctuation of exchange rate on how it ...view middle of the document...
To understand what Mexico gain in the long term
1. For writer : To fulfill “Financial Markets and Institutions” paper task and to understand more about economic crisis and exchange rate.
2. For academic people : It can be used for further observation and research about economic crisis and exchange rate.
3. For government : It can be use as reference in making economic policy, so that it won’t lead to the next crisis.
FINANCIAL CRISIS IN MEXICO 1994-1995
2.1 The Origin
Mexico undertook large scale reform and deregulation of its economy in the second half of the 1980s. Among those reforms, President Miguel de la Madrid’s (1982-1988) decision to liberalize trade and international capital flows were crucial to foster Mexico’s integration with the developed world. His government reduced import tariffs rapidly as part of the Uruguay round of trade negotiations under the General Agreement on Tariffs and Trade (GATT). Furthermore, de la Madrid pursued a series of reforms that facilitated the inflow of portfolio capital and foreign direct investment into the Mexican economy and the expansion of its domestic financial system. Then, in the early 1990s, the administration of President Carlos Salinas de Gortari (1988-1994) commenced negotiations for a foreign trade agreement with the United States, later known as the North American Free Trade Agreement (NAFTA), and further liberalized the financial system, privatizing the largest commercial banks and deregulating the banking system.
2.2.1 Trade liberalization
Since the Great Depression, the Mexican government followed a strategy of import substitution industrialization (ISI). Under ISI the Mexican government instituted a series of policies and regulations to protect domestic industries from international competition. This approach installed not only high import tariffs, but also non-tariff barriers on the importation of foreign goods, and provided subsidies to aid Mexican industries. Under this model, the country’s producers had no incentive to export manufactures because they enjoyed a captive domestic market with little or no competition. The Mexican model of development, based on ISI, continually ran into trouble in the 1970s and 1980s. Except for auto manufacturers and maquiladoras, companies operating under the ISI model did not export much and it was hard for them to get enough foreign exchange to pay for imported capital equipment and intermediate goods. Moreover, severe shortages of foreign exchange also could jeopardize the foreign debt service of the Mexican government, generating damaging exchange rate crisis. In fact, the country had balance of payments crises, i.e., had to devalue its currency, in 1954, 1976, and 1982.
Between 1979 and 1981 the Federal Reserve Board raised interest rates in the United States to record levels to contain inflation in that country, with European central banks also raising rates...