The China Syndrome or the Tequila Crisis

Francisco Gil Díaz

in Latin American Macroeconomic Reforms

Published by University of Chicago Press

Published in print July 2003 | ISBN: 9780226302676
Published online February 2013 | e-ISBN: 9780226302683 | DOI:
The China Syndrome or the Tequila Crisis

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This chapter argues that central banks should take a narrow view of their mandate to lower inflation, making every effort to reduce links to the financial sector in order to avoid moral hazard in the financial system, and pursue a “corner” exchange rate policy: either a pure float or a fixed (through a currency board) exchange rate. The 1995 Mexican financial crisis is used as a case study from which these lessons can be learned. The chapter traces the origins of Mexico's crisis back to the 1982 nationalization of the Mexican banks and thereafter, when appropriate liberalization policies were undermined by both a defective privatization and the flawed decisions of the incoming Zedillo administration. In addition, dysfunctional institutional arrangements placed the responsibility both for conducting exchange rate policy and for providing lender-of-last-resort facilities on the Banco de México, which led many to see the bank's open purse as making its exchange rate policy pronouncements less than fully credible. A commentary is also included at the end of the chapter.

Keywords: Mexican financial crisis; central banks; inflation; monetary policy; exchange rate policy; privatization; Mexican banks

Chapter.  16459 words. 

Subjects: Economic Development and Growth

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