Deja Vu All Over Again? the Mexican Crisis and the Stabilization of Uruguay in the 1970's

Author/Editor:

Mario I. Bléjer ; Graciana Castillo

Publication Date:

July 1, 1996

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Comparing the 1978-82 Uruguayan stabilization with the 1990-94 Mexican experience reveals that exchange rate based stabilization tends to increase the economy’s vulnerability to unexpected shocks. An exchange rate rule, with full capital mobility, can only succeed if compatible financial policies are strictly adhered to--even when severe negative shocks take place--and if reliance on persistent capital inflows is not essential. This requires monetary restraint, even under serious recessionary conditions, and tight fiscal policies to moderate interest rates. The epilogues of both experiences demonstrate that abandoning the exchange rate rule in the wake of a shock, even if inevitable, makes future stabilization more difficult.

Series:

Working Paper No. 1996/080

Subject:

Central banks Domestic credit Exchange rate policy Exchange rates Financial crises Foreign exchange International reserves Money

English

Publication Date:

July 1, 1996

ISBN/ISSN:

9781451955545/1018-5941

Stock No:

WPIEA0801996

Pages:

34

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