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.