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Credibility, Reputation, and the Mexican Peso Crisis

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  • Agenor, Pierre-Richard
  • Masson, Paul R

Abstract

A model emphasizing the tradeoff between the costs of changes of domestic interest rates and exchange rate stability is used to assess the role of credibility and reputational factors in the lead-up to the December 1994 crisis of the Mexican peso. Devaluation expectations are decomposed into the probability that the authorities do not truly put a high weight on exchange rate stability and the probability that an exogenous shock will make a devaluation the preferred policy. Estimates indicate that prior to the peso collapse there was no significant increase in devaluation fears and no perceived shift in the authorities' policy preferences. But the increase in the differential that occurred after the devaluation may have resulted from such a shift.

Suggested Citation

  • Agenor, Pierre-Richard & Masson, Paul R, 1999. "Credibility, Reputation, and the Mexican Peso Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 70-84, February.
    • Handle: RePEc:mcb:jmoncb:v:31:y:1999:i:1:p:70-84
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    Citations

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    Cited by:

    1. Tejada, César A. O. & Portugal, Marcelo S., 2002. "Credibility and Reputation: An Application of the External Circumstances Model for the Real Plan," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 56(4), October.
    2. G J Bratsiotis & W Robinson, 2002. "Economic Fundamentals and Self-Fulfilling Crises: Some Evidence from Mexico," Economics Discussion Paper Series 0214, Economics, The University of Manchester.
    3. Peter Tillmann, 2003. "The Regime‐Dependent Determination of Credibility: A New Look at European Interest Rate Differentials," German Economic Review, Verein für Socialpolitik, vol. 4(4), pages 409-431, November.
    4. Damien Besancenot & Radu Vranceanu, 2003. "Credibility costs in the monetary integration game," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(4), pages 727-741, December.
    5. Haider A. Khan, 2007. "Trade Liberalization and Poverty Reduction in General Equilibrium: The Role of Labor Market Structure," CIRJE F-Series CIRJE-F-462, CIRJE, Faculty of Economics, University of Tokyo.
    6. Berry Wilson & Anthony Saunders, 2004. "Monetary secrecy and selective disclosure: The emerging market case of Mexico's monetary reporting," Review of Financial Economics, John Wiley & Sons, vol. 13(1-2), pages 199-210.
    7. Kenneth N. Kuttner, 2004. "The role of policy rules in inflation targeting," Review, Federal Reserve Bank of St. Louis, vol. 86(Jul), pages 89-112.
    8. Mr. Vladimir Klyuev, 2001. "A Model of Exchange Rate Regime Choice in the Transitional Economies of Central and Eastern Europe," IMF Working Papers 2001/140, International Monetary Fund.
    9. Janine Aron & Ibrahim Elbadawi, 1999. "Reflections on the South African rand crisis of 1996 and policy consequences," Economics Series Working Papers WPS/1999-13, University of Oxford, Department of Economics.
    10. Simón Sosvilla-Rivero & Francisco Pérez-Bermejo, "undated". "Credibility and Duration in Target Zones: Evidence from the EMS," Working Papers 2003-19, FEDEA.
    11. Hefeker, Carsten, 2004. "Default, Electoral Uncertainty and the Choice of Exchange Regime," HWWA Discussion Papers 298, Hamburg Institute of International Economics (HWWA).
    12. Joseph A. Whitt, 1996. "The Mexican peso crisis," Economic Review, Federal Reserve Bank of Atlanta, vol. 80(Jan), pages 1-20.
    13. Ratti, Ronald A. & Seo, Jeonghee, 2003. "Multiple equilibria and currency crisis: evidence for Korea," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 681-696, October.
    14. Khan, haider, 2008. "Analyzing Poverty Impact of Trade Liberalization Policies in CGE Models: Theory and Some Policy Experiments in Agricultural and Non-agricultural Sectors in South Asia," MPRA Paper 7609, University Library of Munich, Germany, revised Mar 2008.
    15. Haider A. Khan, 2007. "Social Accounting Matrices(SAMs) and CGE Modeling:Using Macroeconomic Computable General Equilibrium Models for Assessing Poverty Impact of Structural Adjustment Policies," CIRJE F-Series CIRJE-F-463, CIRJE, Faculty of Economics, University of Tokyo.
    16. Pierre-Richard Agénor, 2002. "Monetary Policy under Flexible Exchange Rates: An Introduction to Inflation Targeting," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.),Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 3, pages 079-170, Central Bank of Chile.
    17. Bohl, Martin T. & Sell, Friedrich L., 2002. "The demand for money by private firms in a regulated economy: Theoretical underpinnings and empirical evidence for Germany 1960-1998," Working Papers in Economics 2002,3, Bundeswehr University Munich, Economic Research Group.
    18. Bratsiotis, George J. & Robinson, Wayne, 2004. "Economic fundamentals and self-fulfilling crises: further evidence from Mexico," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 595-613, June.
    19. Wilson, Berry & Saunders, Anthony, 2004. "Monetary secrecy and selective disclosure: The emerging market case of Mexico's monetary reporting," Review of Financial Economics, Elsevier, vol. 13(1-2), pages 199-210.
    20. Paul R. Masson, 1999. "Multiple equilibria, contagion, and the emerging market crises," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    21. Janine Aron & Ibrahim Elbadawi, 1999. "Reflections on the South African rand crisis of 1996 and its consequences," CSAE Working Paper Series 1999-13, Centre for the Study of African Economies, University of Oxford.

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