Until 1994, Mexico had pegged its currency to the US dollar but starting in December of that year the fixed exchange rate regime collapsed and the peso would go on to eventually lose nearly 50% of its value against the dollar. The Mexican currency crisis has many aspects and the sequence of questions below seeks to retrace the principal stages in which the crisis unfolded. a. b. Consider the evolution of the monetary aggregate M2 over the years 1990-94 (Figure 1). You can safely assume that money growth was much lower in the US over the same period. What implication does this have for Mexico's real exchange rate and the credibility of the exchange rate peg to the dollar? On Tuesday 20th Dec 1994, the limit of the exchange rate band was relaxed by 13%, and the peso immediately depreciated by that amount. The Mexican central bank is said to have lost $6 billion in foreign exchange reserves within the following day in an attempt to defend the peso. Explain in your own words why investors rushed to retract capital out of Mexico. Figure 1 I M2 Billions of $US 120 110 100 90 80 70 60 50 40 30 20 10 0 1985 Central Bank reserves 1986 1987 1988 1989 1990 1991 1992 1993 1994 Until 1994, Mexico had pegged its currency to the US dollar but starting in December of that year the fixed exchange rate regime collapsed and the peso would go on to eventually lose nearly 50% of its value against the dollar. The Mexican currency crisis has many aspects and the sequence of questions below seeks to retrace the principal stages in which the crisis unfolded. a. b. Consider the evolution of the monetary aggregate M2 over the years 1990-94 (Figure 1). You can safely assume that money growth was much lower in the US over the same period. What implication does this have for Mexico's real exchange rate and the credibility of the exchange rate peg to the dollar? On Tuesday 20th Dec 1994, the limit of the exchange rate band was relaxed by 13%, and the peso immediately depreciated by that amount. The Mexican central bank is said to have lost $6 billion in foreign exchange reserves within the following day in an attempt to defend the peso. Explain in your own words why investors rushed to retract capital out of Mexico. Figure 1 I M2 Billions of $US 120 110 100 90 80 70 60 50 40 30 20 10 0 1985 Central Bank reserves 1986 1987 1988 1989 1990 1991 1992 1993 1994