MEXICO BALANCE-OF-PAYMENTS CRISIS - A CHRONICLE OF A DEATH FORETOLD

This paper claims that the roots of Mexico's balance-of-payments crisi s are found in the prevailing high degree of capital mobility and fina ncial globalization. Under these circumstances, shifts in foreign capi tal hows and anticipation of a banking-system bailout may produce larg e imbalances between stocks of financial assets and foreign reserves, threatening the sustainability of currency pegs. Econometric analysis suggests that half of Mexico's reserve losses could be accounted for b y these phenomena. Large financial imbalances are also fertile ground for self-fulfilling-prophesy crises which lead devaluations to produce deep recessions. These difficulties can be partly remedied by appropr iate policies.