MINI CASE: MEXICOS BALANCE OF PAYMENTS PROBLEM

Mexico experienced large-scale trade deficits, depletion of foreign reserve holdings and a major currency devaluation in December 1994, followed by the decision to freely float the peso. These events also brought about a severe recession and higher unemployment in Mexico. Since the devaluation, however, the trade balance has improved.

Investigate the Mexican experiences in detail and write a report on the subject. In the report, you may:

(a) document the trend in Mexicos key economic indicators, such as the balance of payments, the exchange rate, and foreign reserve holdings, during the period 1994.1 through 1995.12.;

(b) investigate the causes of Mexicos balance of payments difficulties prior to the peso devaluation;

(c) discuss what policy actions might have prevented or mitigated the balance of payments problem and the subsequent collapse of the peso; and

(d) derive lessons from the Mexican experience that may be useful for other developing countries.

In your report, you may identify and address any other relevant issues concerning Mexicos balance of payment problem. International Financial Statistics published by IMF provides basic macroeconomic data on Mexico.