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The China Syndrome or the Tequila Crisis

The China Syndrome or the Tequila Crisis

(p.169) 4 The China Syndrome or the Tequila Crisis
Latin American Macroeconomic Reforms
Francisco Gil Díaz
University of Chicago Press

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

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