Lessons from the Tequila Crisis

This paper draws several important lessons from the Tequila Crisis of 1994 and 1995. The overriding lesson is that the dynamics of financial crises in emerging market countries differ from those in industrialized countries be cause institutional features of their debt markets differ. Several policy l essons for emerging market countries also emerge from the analysis: (1) peg ged exchange-rate regimes are extremely dangerous, (2) strong prudential su pervision of the banking system is critical for prevention of financial cri ses, (3) financial liberalization must be managed extremely carefully and ( 4) different policies are needed to promote recovery in emerging market cou ntries than those that are applicable to industrialized countries. (C) 1999 Elsevier Science B.V, All rights reserved.