Deja Vu All Over Again? the Mexican Crisis and the Stabilization of Uruguay in the 1970's
July 1, 1996
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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.
Subject: Central banks, Domestic credit, Exchange rate policy, Exchange rates, Financial crises, Foreign exchange, International reserves, Money
Keywords: Domestic credit, exchange rate overvaluation, Exchange rate policy, Exchange rates, Global, interest rate, International reserves, Mexico's economy, nominal interest rate, North America, policy mix, stabilization strategy, stabilization-cum-reform attempt, trade balance, WP
Pages:
34
Volume:
1996
DOI:
Issue:
080
Series:
Working Paper No. 1996/080
Stock No:
WPIEA0801996
ISBN:
9781451955545
ISSN:
1018-5941
