The 1994 Mexican Economic Crisis: The Role of Government Expenditure and Relative Prices

December 1, 1999

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Eliot Kalter, and Armando P. Ribas The 1994 Mexican Economic Crisis: The Role of Government Expenditure and Relative Prices, (USA: International Monetary Fund, 1999) accessed September 18, 2024

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

This paper discusses the role of a country’s fiscal stance in weakening the financial underpinnings of an open economy with a quasi-fixed nominal exchange rate, even where the overall fiscal deficit remains unchanged, or even narrows. The paper cites the role of expanding government operations in reducing the relative price of traded goods. A marked increase in government expenditure and taxation is associated with increased production costs, excess demand for nontraded goods, and a deterioration in the financial health of the traded goods sector. The paper demonstrates that, in contrast to the current economic situation in Mexico, the period leading to the 1994 crisis closely parallels these stylized facts.

Subject: Bank credit, Commercial banks, Expenditure, Financial institutions, Financial services, Money, National accounts, Private savings, Real interest rates

Keywords: Bank credit, Commercial banks, Deficit, Exchange rate, Goods, Goods price, Goods sector, Government expenditure, Mexican economic crisis, Nontradable goods, Price, Private savings, Rate of return, Real interest rates, Relative prices, WP

Publication Details

Pages:

23
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/160
Stock No:

WPIEA1601999
ISBN:

9781451857726
ISSN:

1018-5941

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