Jun 17, 2015 - views expressed by the following authors were taken into account; Griffith-Jones (1997),Sachs et al (1995), Mishkin (1999), Trumen (1996), ...
ABSTRACT The aim of this paper is to discuss the concept of sustainability of the current account deficit and to employ two major approaches to ascertain the sustainability of the current account deficit of Mexico during the crisis period of 1994. The paper adopts a DebtDynamic model based on the intertemporal budget constraint condition and supplements the analysis with Macroeconomic Composite Indicator Analysis. Finally it tries to identify the relative strengths and weaknesses of each approach.
Amanda Herath
DETERMINING SUSTAINABLE CURRENT ACCOUNT DEFICITS With Special Reference to Mexico 1994 Experience
Masters’ Candidate at Yonsei Graduate School of International Studies , Yonsei University, Seoul, South Korea. 2015/06/17
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Determining Sustainable Current Account Deficits; With Special Reference to Mexico 1994 Experience Amanda Herath 1. Introduction On 20th December 1994 Mexico devalued its peso by 15% against the US dollar in a bid to protect its rapidly depleting foreign reserves. But the attempt exacerbated the investor panic leading to further deterioration of the foreign reserves. Two days later Banco De Mexico was forced to float the peso and to abandon the fixed-peg exchange rate system. Up till then Mexico was hailed as a “Star Student of IMF” for successfully transforming itself from a closed-economy to an open-economy by implementing market liberalization reforms; which included among other things, capital account liberalization, banking -sector liberalization and trade liberalization. Thanks to the reforms the Mexican economy was leaving behind the “lost decade” of stagnant economic growth and chronic high-inflation. Economy was growing, inflation was tamed and fiscal discipline was in place. Yet still, towards the end of the 1994 another currency crisis hit the economy and the following year of 1995 saw a deep recession. At the time most people were dumbfounded and the prominent question was “What went wrong?” With hindsight The International Monetary Fund (IMF) has listed three major causes behind the Mexican Crisis—adverse domestic political and external economic shocks, an unsustainable external position, and domestic policy slippages—and has noted that these views are not mutually exclusive (Truman, 1996). Among the above factors the unsustainable external position or more precisely the unsustainable current account deficit received much attention during 1990’s as the 1997 East Asian crisis was also preceded by large current account deficits of respective countries. The same topic has again come into the spotlight with the widening current account deficit of US. Hence the aim of this paper is to discuss the concept of sustainability of the current account deficit and to employ two major approaches to ascertain the sustainability of the current account deficit of Mexico during the crisis period. Finally it tries to identify the relative strengths and weaknesses of each approach.
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2. Literature Review The general wisdom has been that current account imbalances are to be expected and balanced trade is unlikely to be an optimal outcome for an economy. Standard textbook analysis indicates that the current account is a mirror image of changes in national net indebtedness. A current account deficit reflects dissaving by domestic residents, an excess of absorption over income. The fact that it is occurring reflects a willingness by foreigners to finance that excess absorption by accumulating future claims on the earnings of domestic residents. As a consequence, net foreign liabilities will also grow. Temporary current account deficits reflect reallocation of capital to the country where capital is most productive and thus may not create problems for the economy. However, permanent or persistent deficits can have serious effects. First, they might increase domestic interest rates to attract foreign capital, and second, the accumulation of external debt due to persistent deficits will imply increasing interest payments, imposing an excess burden to future generations. As demonstrated in the Mexican 1994 crisis a large current account deficit may trigger a sharp hike in interest rates, a rapid depreciation of exchange rates and hence may disrupt the performance of the domestic economy. (Camarero et al, 2010), (Zubaidi et al, 2005). 2.1 Notions of Sustainability Scholars have tried to look at the concept of sustainability of external balances from various perspectives. These different notions have given birth to different methods of determining sustainable external positions. By highlighting the outcomes of a sustainable and unsustainable current account deficits, Mann (2002) provides an easy to understand definition of sustainability. “A sustainable current account represents a stable state in which the deficit generates no forces of its own to cha nge its trajectory. On the other hand, an unsustainable current account disequilibrium triggers by its own forces an interest rate hike, a large depreciation, or some other sudden domestic or global economic disruption” (Mann, 2002). One of the most cited clarification of the concept can be found in the paper published by Milesi-Ferretti and Razin (1996). According to them three interrelated concepts are relevant to external imbalances. Is the debtor country solvent? Are current account imbalances
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sustainable? Is the current account deficit excessive? Solvency is theoretically defined in relation to an economy’s present value budget constraint. In this sense, an economy is solvent if the present discounted value of future trade surpluses equals current external indebtedness. This can be stated as follows; Intertemporal Solvency condition: PV of future trade surplus (current account surplus) = PV of Present External Liabilities stock The practical applicability of this definition is hampered by the fact that it relies on future events and policy decisions without imposing any “structure” on them. For an example if the future trade surpluses are sufficiently large any deficit/ surplus path (any policy type) can be said to be of conformity with the intertemporal solvency condition. Therefore researchers have tried to define a baseline structure for future possible paths. This gives rise to the notion of “sustainability”. The current policy path is “sustainable” if its continuation in the indefinite future does not violate intertemporal solvency condition. Defining sustainability as above is complex in the case of current account imbalances because current account imbalance is the result of decisions made by not only the government but also by the private economic agents. Therefore we cannot ascertain a single “current policy”. An alternative way of looking at the sustainability of current account balance c an be; Is a continuation of the current policy stance and the present private sector behavior going to entail the need for a “drastic” policy shift (ex- sudden monetary tightening) or lead to a “crisis” (ex- exchange rate collapse)? If the answer is “Yes”, then we can perceive a case of unsustainability. This drastic change or crisis can be triggered by a domestic or an external shock which causes a shift in the investor’s confidence and a reversal of capital flows. The other concept of whether a given current account balance is “excessive” can only be answered if there is a benchmark that gives information on the “appropriate” level of current account imbalances. The actual imbalances can then be compared with the predicted ones to judge whether they have been excessive. (IMF, 1998). The three concepts of solvency, sustainability and excessive current account deficits imply an increasing order of restrictiveness. The solvency concept is based on the intertemporal budget constraints and can accommodate a variety of future behavior patterns. The concept of
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sustainability is based on the continuation of the current policy stance and imposes more structure on the future behavior. The concept of excessive current account deficit is based on deviations from and “optimal” benchmark which impos es further restrictions on the future behavior. (Milesi-Ferretti and Razin, 1996). 2.2 Methods of Measuring Sustainability Various scholars have come up with various methods to measure the sustainability of the current account. Generally two types of approaches are adopted by the economists. The first approach builds upon the intertemporal budget constraint of sustainability. The measures that fall under this approach vary from simple debt-dynamic models to highly sophisticated econometric models. The second approach relies instead on a composite set of macroeconomic, financial and external indicators to evaluate the sustainability of current account deficit. (IMF, 1998). Graph 01
Evaluating Sustainability
Based on Intertemporal Budget Constraint
Based on Composite Macroeconomic Indicators
Debt-Dynamic Models (Milesi-Ferretti and Razin 1996, Edwards 1997, Reisen 1998)
Time Series Econometric Models based on Stationary concept (ObstfeldRogoff Redux Model )
This paper adopts the conventional debt-dynamic model proposed by the Reisen (1998) which is itself based on the models by Milesi-Ferretti and Razin (1996), and Edwards (1997). Since a study of the composite macroeconomic indicators can be complementary to the study of debt-dynamic models, in this analysis I will also look into some of the structural features of the Mexican economy in order to ascertain the sustainability of the current account deficit of Mexico during 1988-1994 period.
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3. Methodology 3.1 Debt-Dynamic Model Reisen (1998) employed a conventional debt dynamics equation to arrive at a notion of intertemporal solvency, emphasizing the role of potential GDP growth, the real exchange rate and the desired level of foreign exchange reserves. The following description summarizes the key points of the model. Consider an economy in steady state, in which consumption, investment, public expenditure and the stock of foreign assets (liabilities) are constant as a fraction of GDP. Then what is the long-run net resource transfer (trade surplus) that an indebted country must have in order to keep the debt to output ratio constant? In this steady state economy the liabilities as a fraction of the country’s GDP that foreigners are willing to hold in equilibrium are denoted by ᵭ. ᵭ can be interpreted as ‘equilibrium portfolio share’. In equilibrium, i.e. with ᵭ held constant, the country accumulates net liabilities, equal to the current account deficit CAD plus the net accumulation of international reserves FX, both as fractions of GDP, in proportion to its long-run GDP growth, ϒ. CAD + ΔFX = ϒᵭ
(1)
Long-run GDP growth also exerts two indirect effects on the steady state current account that is consistent with a stable debt-to-GDP ratio. First, as the economy expands, the desired level of international reserves also grows. As the economy grows the level of imports grow as well thus increasing the demand for reserves. Denoting real annual import growth by η , the change in the desired reserve ratio can be written as; ΔFX= [ ( 1 + η ) / ( 1 + ϒ ) ] FX – FX
(2)
Incorporating (2) in to (1) yields; ϒᵭ= CAD + [ (η - ϒ ) / (1 + ϒ )] FX
(3)
A second channel through which GDP growth indirectly impacts on debt dynamics is the Balassa-Samuelson effect. In the long run, relative growth leads to real exchange rate appreciation, largely driven by the evolution of productivity differentials between traded and non-traded goods in the domestic economy and in the rest of the world. Real exchange rate
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appreciation per unit of GDP growth denoted by ϵ , reduces both debt and foreign exchange reserves as a fraction of GDP, so that Equation (3) becomes; ( ϒ + ϵ ) ᵭ = CAD + [ (η + ϵ - ϒ )/ (1 + ϒ ) ] FX
(4)
By adjusting the above equation we get; CAD = ( ϒ + ϵ ) ᵭ - [ ( η + ϵ - ϒ )/ (1 + ϒ ) ] FX
(5)
Equation (5) describes the steady-state current account deficit that can be sustained over the long run if the debt ratio remains constant and desired reserves rise in proportion to import growth. To operationalize this model the parameters were estimated as follows; Time span – Since the Mexico began to undertake economic reforms beginning from 1986, the time span for this study was determined to be from 1986 to the pre-crisis year 1993. ϒ - The long-run GDP growth was assumed to be similar to the average GDP growth ratio for the period of 1986- 1993. ϵ - Since the Real Exchange rate is the most volatile variable of all, appreciation of real exchange rate per unit of GDP growth was calculated for each separate year by dividing the real exchange rate appreciation by the yearly GDP growth ratio. The average of the resulting ratios were taken into account. ᵭ - It is assumed that for Mexico foreign investors were comfortable with tolerating a debt ratio of 50% of GDP. Since Mexican economy was praised to be a star of the economic reform process this notion is not widely over mark. η – The average of the annual import growth for the period of 1986- 1994. FX – the desired level of foreign exchange reserves is assumed to be equal to half the import ratio indicating sufficient reserves to cover 6 months of imports. The data was mainly obtained from the World Bank Database and the Real Exchange Rate data was obtained from the Banco De Mexico Database. With the advantage of hindsight it is easier to ascertain whether a given current account deficit was sustainable or not. But from a policy makers stand point who only has access to
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present data, without the advantage of prophetic knowledge of how the things might unfold in the future, can he ascertain whether the economy is having an unsustainable current account deficit? In order to answer that question, later on I introduce some modifications to the parameter estimates to reflect the situation faced by the Mexican policy makers at that time to see whether the debt-dynamic model can be a useful model in ascertaining the sustainability in real-time. 3.2 Macroeconomic Indicators of Sustainability Milesi-Ferretti and Razin (1996) identified number of operational indicators that can provide useful signals as to the sustainability of the external position. The indicators and their likely signals are summarized in the Table 1. As most of these indicators require a certain degree of value judgments , in this paper I will rely upon the consensus that has arisen regarding the Mexican Crisis of 1994. In particular the views expressed by the following authors were taken into account; Griffith-Jones (1997),Sachs et al (1995), Mishkin (1999), Trumen (1996), Musacchio (2012), Whitt (1996), Boughton (1995), Edwards(1997), Edwards & Savastano (1998),Gil-Diaz (1994), van der Molen(2013).
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Table 01 Indicator Structure
Signal
Investment/ Savings Ratio
Economic Growth
High -
Low –
Sustainable
Unsustainable
Fast- Sustainable
SlowUnsustainable
Openness – Exports/GDP Ratio
High- Sustainable LowUnsustainable
Composition of
Debt/ Equity
Low- Sustainable
External Liabilities
HighUnsustainable
Short Term
Low- Sustainable
Liabilities/ Long
HighUnsustainable
Term Liabilities
Dollar
Low- Sustainable
denominated/
HighUnsustainable
Local Currency denominated Macroeconomic
Monetary and
Persistent Real Exchange rate appreciation + Fixed or
Policy
Exchange rate
Managed Exchange Rate - Unsustainable
Policy Fiscal Policy -
Low- Sustainable
High- Unsustainable
Liberal - Sustainable
Protectionist-
Budget Deficit Trade Policy
Unsustainable Capital Account
Very Open capital account + Weak financial supervision
Policy
and weak banking system - Unsustainable
Political Economy Election Time
If near – unsustainable
Weak Government unsustainable
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4. Data Analysis and Discussion 4.1 Debt- Dynamic Model Table 2 presents the results of the debt dynamic model using the long-run parameter estimates. Table 02
Scenario 1
Scenario 2
Import Growth(η)
0.241424438
0.241424438
6 months imports (FX*)
0.120712219
0.120712219
Total Reserve/GDP (FX)
0.051646093
0.051646093
ᵭ*
0.5
0.5
ᵭ
0.482118041
0.482118041
ϒ (long-run)
0.02565775
0.02565775
ϵ
0.000256578
0.000256578
Sustainable CAD
0.012531874
0.010899177
Sustainable CAD %
1.253187434
1.08991769
0.067
0.067
Actual CAD at the end of 1993
Actual CAD % at the end of 6.7
6.7
1993 Actual CAD (Average) Actual CAD (Average) % Note- CAD (+) values – Deficit
0.036
0.036
3.6
3.6
CAD (-) values - Surplus
In scenario 1 the model tries to determine the sustainable current account deficit given that the investors desire to maintain an equilibrium portfolio share of 50% of GDP and Mexico wants to maintain enough foreign reserves to sustain 6 months of imports. Given the country’s long-run economic growth then Mexico’s sustainable current account deficit would have been at around 1.25% of the GDP. As can be seen from the actual current account deficit at the end of 1993, the actual CAD far exceeds the sustainable CAD level. If we compare the actual CAD value average for the period, the gap lessens a bit but still there is a considerable gap between the sustainable value and the actual value.
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Scenario 2 takes into account a slightly different situation where the investors’ willingness to hold the country’s debt (ᵭ) is replaced by the actual value. It can be argued that the actual value of the portfolio holdings gives a better representation of investors’ confidence regarding the country’s performance. As can be seen in the table, for Mexico the investor’s confidence and willingness threshold was pretty high, almost closer to 50%. Hence the resulting sustainable CAD value is very much closer to the value of scenario 1. In both of these scenarios Mexico seemed to have maintained a current account deficit, beyond the sustainable level of current account deficit as indicated by the debt dynamic model. If the policymaker had to make the decisions only based on the present data available to him, can he still use the debt-dynamic model as a guideline to find warning signs of unsustainable current account deficits? I argue that the answer is “Yes”. Even though the debt-dynamic model is built upon the long-term concept of long-term solvency, the model can still be a useful tool when used with current year data as well. In the Table 3, I present the sustainable CAD value calculations based on the yearly data for Mexico during 1987 – 1996 period. In this scenario 3 the constraints of the model changes as follows; Given the assumption that the current year growth rate may continue into the future and also the investor’s would be willing to hold the same amount of debt share in the future while the country maintains the foreign reserves to maintain imports for 6 months based on the value of the current year import growth, what would be the sustainable current account deficit? As can be seen from the results, for the most of the years under concern the debt dynamic model suggests that Mexico should maintain current account surplus or a deficit around 1% of the GDP. For some years the values suggested by the model are absurdly high (as 16% and 27% of GDP).Reasons behind these outliers are explained in the Table Notes. Apart from those values all other values seem to be suggesting a fairly good level of caution in maintaining the current account deficit. For the years that the actual CAD value is available, a comparison with the sustainable CAD, reveals the fact that the current account deficit is yawning beyond the healthy levels.
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Table 03
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
0.079724778
0.808243
0.251902
0.217976
0.170665
0.216264
-0.0548
0.208032
-0.14471
0.324735
0.039862389
0.404122
0.125951
0.108988
0.085333
0.108132
-0.0274
0.104016
-0.07236
0.162368
0.097616044
0.034545
0.030228
0.03889
0.057408
0.052725
0.0502
0.012215
0.049581
0.049136
ᵭ
0.781760551
0.542739
0.421641
0.398175
0.363232
0.309235
0.259237
0.262947
0.481325
0.393402
ϒ (annual)
0.01855747
0.012454
0.041983
0.050683
0.042223
0.036287
0.040614
0.047274
-0.05759
0.058748
ϵ
0.211354467
0.251975531
-0.019280791
-0.017014921
0.018865728
-0.006912586
0.020537512
-0.03804499
0.089416953
0.113972016
Sustainable CAD
0.169070637
-0.274699001
-0.013471445
-0.002182646
0.010128269
-0.008975036
0.013881036
-0.009761416
0.015496453
0.00967834
Sustainable
16.907063731
-27.469900142
-1.347144483
-0.218264563
1.012826921
-0.897503605
1.388103635
-0.976141551
1.549645267
0.967834006
Actual CAD
NA
NA
0.014
0.026
0.027
0.046
0.067
0.068
0.079
NA
Actual CAD %
NA
NA
1.4
2.6
2.7
4.6
6.7
6.8
7.9
NA
Import Growth(η)
6 months imports (FX*)
Total Reserve/GDP (FX)
CAD %
1 2
As per the economic reforms the fixed exchange rate was fixed at a depreciated value in 1986. Hence the sustainable CAD goes up due to depreciated currency. When the economy was opened in 1987 the imports shot up as can be seen from import growth value. To maintain that imports CAD should move to a large surplus.
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Even from a year-to year comparison of the results suggests that country is not maintaining a healthy current account balance. This analysis supports my argument that this simple debt-dynamic model can be a useful tool in determining the current account health even without adopting the long-term view of its original making. 4.2 Macroeconomic indicators of the Sustainability Should a policy maker be panic stricken just after reading the warning signs from a number crunching mathematical model? For several reasons some authors are strongly critical of just relying on the mathematical models. They argue that crises can occur because of other imbalances of the market and not just because of the current account position. According to this view point sustainability should be ascertained from other perspectives as well. By following the consensus of various scholars the macroeconomic landscape of Mexico before and during the crisis period is summarized in the Table 04. The cages highlighted in red color (or with a) indicates that Mexico is showing a weak position on that specific aspect and the cages highlighted in green (or with a) indicates that Mexico is showing a strong position in that aspect. As can be seen in the table, for most of the indicators Mexico was showing a weak position at that time. In other words Mexico was still residing in the “zone of vulnerability” despite its healthy performance in some aspects. These results when taken together with the results from the debt-dynamic model, suggest that Mexico was having an unsustainable external position before the crisis occurred in 1994. The devaluation of December 20th shook the system and the already feeble external position collapsed with a massive uproar.
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Table 04 Indicator Structure
Signal
Investment/ Savings Ratio
High -
Low –
Sustainable
Unsustainable
Fast-
Slow-
Sustainable
Unsustainable
High-
Low-
Sustainable
Unsustainable
Low-
High-
Sustainable
Unsustainable
Short Term
Low-
High-
Liabilities/ Long
Sustainable
Unsustainable
Dollar
Low-
High-
denominated/
Sustainable
Unsustainable
Economic Growth
Openness – Exports/GDP Ratio
Composition of
Debt/ Equity
External Liabilities
Term Liabilities
Local Currency denominated Macroeconomic Policy
Monetary and
Persistent Real Exchange rate appreciation + Fixed or
Exchange rate
Managed Exchange Rate - Unsustainable
Policy Fiscal Policy -
Low- Sustainable
High- Unsustainable
Liberal - Sustainable
Protectionist-
Budget Deficit Trade Policy
Unsustainable Capital Account
Very Open capital account + Weak financial
Policy
supervision and weak banking system Unsustainable
Political Economy
Election Time
If near – unsustainable
Weak
unsustainable
Government
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5. Strengths and Weakness of the approaches As can be seen from the present case of Mexican Peso crisis of 1994, both of the approaches give out sufficient warning signs to alert the policy makers who actually care enough to pay attention to those. Even with various short-comings of conceptualization both of the models were able to catch-up to the fact that the external position of Mexico was not healthy. Hence we can conclude that both of the approaches have some power of giving out warning signs and in particular when used together the each approach strengthens the other approach. In conclusion both approaches can be of good policy tools in policy- makers’ arsenal. As for the weaknesses of the debt-dynamic model, it gives only a small breathing space for the developing to countries to maintain a deficit. As can be seen from the Mexico case here, the suggested sustainable CAD level was only around 1% of the GDP. For a developing country, which relies on importation of investment goods and other investment materials to kick start their growth process, these levels can be seen as very much restrictive. At the same time this model does not distinguish between the foreign direct investment and portfolio investment, which can have very different impact on the capital outflows during a crisis period. Some authors have also argued that models such as these can give out false warning signs as well. (Camarero et al,). One of the weaknesses of the indicator based models is that much of the necessary data to analyze the said indicators become available with a time lag. Hence the ability to forecast in a timely manner will be hampered due to lack of sufficient data to draw conclusions from. Even for the case of Mexico we had to rely on the consensus that emerged after the crisis. For a policy maker who is trying to make decisions based on the present available data these patterns may prove much elusive than for a historical data analyst. Another shortcoming of this approach is that the problem of “how to rank” the different indicators and how to derive decisions when each of the indicators give mixed signals. As for our Mexico case, the economic growth, trade openness were giving out positive signs. Obviously the Mexican government at the time placed a high value on these indicators rather than on other indicators. Therefore when using this approach an analyst will have to make some value judgments as to which indicators would get high priority, which signs are to be ignored and which are to be accepted.
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6. Conclusion This paper attempted to discuss the concept of sustainability of current account deficit and to ascertain the sustainability of the current account position of Mexico during 1986-1994 period using two major approaches namely; debt-dynamic model and macro-indicators method. According to both measures Mexico was maintaining an unsustainable current account position during the pre-crisis period. Hence the paper concludes that when used complementarily both measures can provide valuable insights as to the sustainability of the current account deficit.
Reference Backus, D., Henriksen, E., Lambert, F., & Telmer, C. (2009). Current account fact and fiction, 41. Retrieved from http://www.nber.org/papers/w15525 Bordo, M. D. (1998). Financial Crises : Characteristics and indicators of vulnerability. International Monetary Fund, 9(February 1997), 74–97. Boughton, J. M. (1995). Tequila Hangover : the Mexican Peso Crisis and Its Aftermath. In HISTORY OF THE INTERNATIONAL MONETARY FUND; Tearing Down Walls The international Monetary Fund 1990-1999 (pp. 455–496). International Monetary Fund. Retrieved from http://www.imf.org/external/pubs/ft/history/2012/ Calvo, G. A., & Mendoza, E. G. (1996). Mexico’s balance-of-payments crisis: a chronicle of a death foretold. Journal of International Economics. doi:10.1016/S0022-1996(96)014365 Camarero, M., & Tamarit, C. (2010). An assessment of the sustainability of current account imbalances in OECD countries. Retrieved from www.ub.edu/jei/papers/TAMARIT.pdf Camdessus, M. (1995). Drawing Lessons fron the Mexican Crisis: Preventing and Resolving Financial Crises- The Role of IMF. Washington: International Monetary Fund. Retrieved from https://www.imf.org/external/np/sec/mds/1995/mds9508.htm Choi, H., & Mark, N. C. (2010). Trending Current Accounts (No. 15244). Retrieved from http://www.nber.org/papers/w15244 NATIONAL Edwards, S. (1997). The Mexican peso crisis: How much did we know? When did we know it? (No. 6334). National Bureau of Economic Research Working Paper. doi:10.1111/14679701.00117
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Edwards, S., & Savastano, M. A. (1998). The Morning After: The Mexican Peso in the Aftermath of the 1994 Currency Crisis. National Bureau of Economic Research Working Paper Series, No. 6516. doi:10.3386/w6516 Eichengreen, B., Rose, A. K., & Wyplosz, C. (1994). Speculative Attacks on Pegged Exchange Rates: An Empirical Exploration with Special Reference to the European Monetary System. NBER Working Paper No. 4898. Gil-diaz, F. (1994). THE ORIGIN OF MEXICO ’ S 1994 FINANCIAL CRISIS Regulatory Failures , Credit Growth , and the Onset of the Crisis. Cato Journal, 303–313. Griffith-Jones, S. (1997). Causes and Lessons of the Mexican Peso Crisis (No. 132). World Institute for Development Economic Research. Retrieved from http://www.wider.unu.edu/publications/working-papers/previous/en_GB/wp132/_files/82530852675984914/default/WP132.pdf Kalter, E., & Ribas, A. (1999). The 1994 Mexican Economic Crisis The Role of Government Expenditure and Relative Prices. IMF Working Paper (Vol. 99). Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=880687 Masson, P., & Agenor, P.-R. (1999). The Mexican Peso Crisis: Overview and Analysis of Credibility Factors (No. 96/6). Retrieved from http://ssrn.com/abstract=882907 Maxwell, K. (1997). The Mexican Peso Crisis: International Perspectives. Foreign Affairs, 76(2), 188–189. Milesi-Ferretti Assaf, G. M. ; R. (1996). Current account sustainability: Selected east Asian and Latin American experiences. International Monetary Fund Working Paper, (WP/96/110). Milesi-Ferretti, Maria, G., & Razin, A. (1996). Sustainability of persistent current account deficits. National Bureau of Economic Research Working Paper, (5467). Mishkin, F. S. (1999). Lessons from the Tequila Crisis. Journal of Banking & Finance, 23(10), 1521–1533. doi:10.1016/S0378-4266(99)00029-1 Musacchio, A. (2012). Mexico ’ s financial crisis of 1994-1995 (No. 12-101). Retrieved from http://nrs.harvard.edu/urn-3:HUL.InstRepos:9056792 Reisen, H. (1998). Sustainable and excessive current account deficits. Empirica, 25(2), 111– 131. doi:10.1023/A:1006850620095 Sachs, J., Tornell, A., & Velasco, A. (1995). The Collapse of Mexican Peso; What have we Learned? New York Univeristy Economic Research Reports, 58. Sachs, J., Tornell, A., & Velasco, A. (1997). Financial Crises in Emerging Markets: The Lessons From 1995. Brookings Papers on Economic Activity. doi:10.2307/2534648
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Truman, E. (1996). The Mexican peso crisis: Implications for International Finance. Federal Reserve Bulletin, 199–209. doi:10.1111/1467-9701.00117 Urrutia, C., & Meza, F. (2010). Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations. IMF Working Papers. Retrieved from http://works.bepress.com/currutia/6/ Van der Molen, M. (2013). The Tequila crisis in 1994. Rabobank Economic Research Department. Retrieved from https://economics.rabobank.com/publications/2013/september/the%2Dtequila%2Dcri sis%2Din%2D1994/ Zubaidi, A., Lau, E., & Fountas, S. (2013). Current Account Deficit Sustainability : a Panel Approach Current Account Deficit Sustainability : Approach a Panel. Journal of Economic Integration, 20(3), 514–529.
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Appendix Ratio Calculations for the Whole Time Period from 1986-1996 1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Averages (19861993)
Import NA Growth(η) 6 months NA imports (FX*) Total 0.051557 Reserve/GDP (FX) ᵭ 0.780925
0.07972478
0.808243
0.251902
0.217976
0.170665
0.216264
-0.0548
0.208032
-0.14471
0.324735
0.2414244
0.03986239
0.404122
0.125951
0.108988
0.085333
0.108132
-0.0274
0.104016
-0.07236
0.162368
0.1207122
0.09761604
0.034545
0.030228
0.03889
0.057408
0.052725
0.0502
0.012215
0.049581
0.049136
0.0516461
0.78176055
0.542739
0.421641
0.398175
0.363232
0.309235
0.259237
0.262947
0.481325
0.393402
0.482118
ϒ (annual)
-0.03754
0.01855747
0.012454
0.041983
0.050683
0.042223
0.036287
0.040614
0.047274
-0.05759
0.058748
0.0256578
ϒ (long-run)
0.025658
0.02565775
0.025658
0.025658
0.025658
0.025658
0.025658
0.025658
0.025658
0.025658
0.025658
NA
0.251976 NA
-0.01928 0.014
-0.01701 0.026
0.018866 0.027
-0.00691 0.046
0.020538 0.067
-0.03804 0.068
0.089417 0.079
0.113972 0.0656464 NA 0.036
NA
1.4
2.6
2.7
4.6
6.7
6.8
7.9
ϵ
NA
Actual CAD
NA
0.21135447 NA
Actual CAD as a % of GDP
NA
NA
NA
3.6
