MEXICAN PESO

CRISIS
1

BF2207 INTERNATIONAL FINANCE

ANNA OFELIA GENBLAD

HE YEQI
JAPHETH ENG KIAN HUI
JEREMY PHUA WEI JIE
NG JIA WEI

(N1501179F)
(U1311187D)
(U1210859H)
(U1410359A)
(U1410952A)

CONTENTS
Introduction.............................................................................1
Causes of the Crisis...................................................................1
Political Instability....................................................................................1
Economic Instability.................................................................................2
In a Nutshell.............................................................................................3
Application of Financial Theories to the Crisis.............................3
Purchasing Power Parity...........................................................................3
International Fisher Effect........................................................................3
Consequences........................................................................... 4
Economic Consequences..........................................................................4
Social Consequences................................................................................5
Opportunities...........................................................................................5
Policies....................................................................................6
Floating of the Peso..................................................................................6
US Government Bailout............................................................................6
Austerity Measures...................................................................................6
Lessons For MNCs.....................................................................7
Long-Term Current Account Deficits.........................................................7
Political Climate........................................................................................7
Take Advantage of International Network.................................................8
Understand International Bailouts............................................................8
Seek Alternative Opportunities................................................................8
Global Awareness.....................................................................................8
Conclusion................................................................................ 9
Bibliography...........................................................................10
Appendices.............................................................................11

INTRODUCTION
In 1994, Mexico went through the nations worst economic crisis since the
30s, as the Peso weakened considerably. It all started in 1980 when the
economy in Mexico went through a rapid transformation. A combination of
adverse political shocks and a large current account deficit then led to
extensive short-term external borrowing and a decline in reserves. In the
early 1990s, the country appeared to have recovered as foreign investors
increased their investments in the country. However, in 1992, after Mexico
signed the North American Free Trade Agreement (NAFTA) with the US and
Canada to reduce trade barriers and promote trade opportunities, a streak
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of political events and economic uncertainty hit Mexico. This, coupled with
mismanaged policies by the government, caused the devaluation of the
Pesos intrinsic value. In December of the same year, the government
could no longer maintain the peg of the Peso to the USD, despite the Peso
having been fixed to the USD since 1954 (Chinese University of Hong
Kong, 2000). Upon the unpegging, the Pesos value dropped by 50%,
leading to an increase in inflation from 7% to 35.1%. With that, the
Mexican Peso Crisis (MPC) unfolded, plunging the country into economic
depression whose effects lingers to this day.
In this report, we will discuss in detail the causes that led to the
unpegging and consequently the crisis, with references to theories learned
in class, before talking about the economic and social consequences
within Mexico as well as the policies implemented in reaction. Finally, we
reflect on the lessons learned from the crisis from the particular
perspective of an MNC.

CAUSES OF THE CRISIS

The streak of events that caused the crisis can be classified into two broad
categories: political and economic. To a large degree, they respectively led
to extensive capital flight and a massive current account deficit which
then depleted Mexicos foreign reserves (Appendix A), which then forced
the government to float the Peso.

POLITICAL INSTABILITY

On 17th December 1992, the NAFTA was signed, which significantly

enhanced trading among Mexico, Canada, and the United States as trade
barriers were eliminated through tariff and duty reductions etc. The
agreement, however, also sparked huge political instability, ultimately
leading to a drop in foreign investment flows to Mexico (Appendix B).

Civil Uprising in Chiapas

The leftist militant group known as the Zapatista Army of National

Liberation from the state of Chiapas strongly opposed the idea of
globalisation. They believed that the removal of trade barriers would
increase the income inequality gap in Mexico, as Mexican consumers will
choose to import from overseas rather than buy locally produced goods.
They also believed that the NAFTA would impact Chiapas the most, as the
region depends heavily on agriculture, which is a sector that is especially
under threat due to the US and Canada having more efficient and
advanced firms that can produce cheaper agricultural goods. Furthermore,
with Chiapas status as one of the poverty-stricken regions in the country,
the group was outraged upon confirmation of NAFTA. They took up arms
and ignited a civil war as a sign of rebellion against the government on
the same day NAFTA took effect on 1st January 1994.

1994 Presidential Election in Mexico

Amidst the unstable political environment in 1994, the state held the
general election in the same year. Hence, decisions relating to monetary
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and fiscal policies were made subjectively to gain favour from the citizens
and earned their votes. This contributed to the economic instability, which
will be discussed later on.

Assassination of a Prominent Politician

With the multitude of political issues, investors confidence in Mexico was
already shaky. The assassination of presidential candidate Luis Donaldo
Colosio in 1994 dealt another blow to the political stability that affirmed
some of the investors decision to pull their funds. The remaining ones
demanded higher risk premia due to the higher country risk (Appendix C).

ECONOMIC INSTABILITY
This section will explain the economic factors and actions that contributed
crucially to the depletion of Mexicos foreign reserves, namely inflationary
pressures, and mismanaged fiscal and monetary policies (University of
California San Diego, 2012).

Inflation
In the early 1990s, Mexico was experiencing an increasing current account
deficit that hit an all-time high at US$30 billion in 1994 (Kalter & Ribas,
1999). This was partly due to the high inflation rate during that period that
averaged 16.31% annually (Federal Reserve Bank of St. Louis, 2015).
Given that prices of goods were rising in Mexico, it encouraged Mexican
consumers to source for cheaper options and increase their imports from
US, especially after NAFTA took effect. The increase in imports led to a
reduction in the current account balance. More importantly, it resulted in
less demand of Peso and more demand of USD, and so in theory, Peso
should depreciate against USD (Appendix D).

Monetary Policy - Maintaining the Peg

The current account deficit was exacerbated by Mexicos attempts to
defend its pegged system. Even though the Peso should have depreciated
due to high imports from the US, the Mexican government decided to
intervene by buying Pesos in the forex market to maintain the Pesos
appreciation against the USD. They funded this operation with the
issuance of Tesobonos, a Treasury Bill indexed in USD i.e. investors paid
USD to buy the bill, and received their proceeds in USD upon maturity.
This was popular among investors as they would not have to take on
exchange rate risks. With the Peso stronger than it should have been,
import levels remained consistently high, which deepened the deficit.
Furthermore, as the bills matured, the Mexican government had to further
deplete their foreign reserves to pay off these bills in USD. Finally,
speculators were somewhat privy to the Peso being maintained at an
artificially high level, and thus took advantage of the perceived
overvaluation by flooding the market with Pesos, which of course
worsened the situation. Speculation activity also encouraged investors to
pull their investments from Mexico, which reduced the capital account
balance, leading to even more depletion of the foreign reserves.

Monetary Policy Interest Rates

Despite the higher inflation caused by the increased consumption, interest
rates remained at an average 14% in 1994, the lowest since 1979 (Federal
Reserve Bank of St. Louis, 2015). The monetary policy was not tightened,
this allowed consumers to continue spending and importing instead of
saving. The reason for keeping interest rates low was likely due to the
gaining popularity by candidates in view of the upcoming election held in
1994 (Appendix E).

Fiscal Policy Government Expenditure

The trade liberalisation from NAFTA led Mexico to pursue its economic
expansion objective. As a result, the government increased its budgeted
expenditure to stimulate the economy. The expansion of fiscal policy in
the early 1990s caused an increased pace of depletion in foreign reserves,
leaving limited resources to defend Mexicos peg when they should limit
their expenditure to slow the outflow of reserves (Appendix F).

IN A NUTSHELL
It is evident that a mixture of political and economic factors led to the
unfortunate event: the political circumstances not only created unrest and
anxiety amongst investors, leading to a steady outflow of capital, but also
encouraged the incumbent government to implement thoughtless policies
in an attempt to appease the people; these economic actions by the
government in fact actively depleted the foreign reserves, weakening the
central bank. As reserves declined, and capital flew out of the country,
this led to the inevitable default of the central bank. With little foreign
reserves to finance the maintenance of the peg, the Mexican government
was forced to allow the Peso to float. Market forces took over and caused
the Peso to depreciate by more than 50% against USD in December 1994
(Appendix G).

APPLICATION OF FINANCIAL THEORIES TO

THE CRISIS
PURCHASING POWER PARITY
In determining if the Purchasing Power Parity (PPP) theory holds, we
looked at the inflation rate differentials between Mexico and the US.
Mexicos inflation rate is on average 7.8% higher than US from 1992 to
1994 (Federal Reserve Bank of St. Louis, 2015), and this suggests the Peso
value should have dropped as Mexican consumers sought cheaper goods
from the US. The downward pressure was instead negated by the Mexican
governments actions. While the direction of the shift was consistent with
PPP, the magnitude of the actual shift displayed disparity as it did not
move as much as the theory suggests. Hence, there may be external
influences not accounted for by the theory.

INTERNATIONAL FISHER EFFECT

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Next, we sought to determine if the International Fisher Effect (IFE) holds
as well. According to the theory, the nominal interest and inflation rates
can be used to compute real interest rates. From the data, we observed
that the real interest rates in Mexico are on average higher than US
(Appendix H). IFE also states that exchange rates should adjust to
equalize real interest rates everywhere in the world (Madura, 2015). While
it is true that Mexicos exchange rate had depreciated to reflect its higher
real interest rates, the magnitudes of changes, similar to above, do not
tally as well: for instance, the real interest rate differential between US
and Mexico is 5.5% in 1994; according to IFE, the Peso should then
depreciate by 5.5% against the USD. Instead, it depreciated by 8.33%
(Federal Reserve Bank of St. Louis, 2015). The difference is likely due to
influence of external factors. Thus, we conclude that while the concept
holds, depreciation is caused by more than just inflation and interest rate
differentials.

CONSEQUENCES
Following the Mexican governments decision to remove the peg, it shook
Mexicos economy and resulted in social and economic consequences
seen in the country. However, the crisis also provided opportunities for
companies to invest and expand in Mexico at cheap valuations.

ECONOMIC CONSEQUENCES
Recession in Mexico

The MPC sparked a severe recession, marked by business cycle

contractions and general slowdown in economic activity in Mexico. This
was the result of the devaluation of the Peso which resulted in many
investors withdrawing their funds from Mexico in view of further
depreciation as it would reduce their investments when converted to the
investors local currency. This resulted in the countrys GDP declining by
6.2% over the course of 1995. In order to prevent further capital outflow
from the country, the government increased short term interest rates.
However, not only did it not manage to stem the outflow of foreign
currency, it also resulted in Mexican citizens not being able to keep pace
with the rising interest rates, culminating in the default of thousands of
mortgages and homes being repossessed. This ultimately resulted in the
collapse of banks as the banks were unable to honour their foreign
currency liabilities.

Hyperinflation

As a result of the huge devaluation of the Pesos, Mexicos foreign imports

became more expensive when denominated in local currency. This
resulted in hyperinflation occurring within the country as evidenced by the
inflation rising sharply from 7% in 1994 to 35.1% in 1995 (Appendix I).
This was compounded by the fact that Mexico had a history of high
inflation which worsened the inflation outlook. With no change in the
nominal wages of the Mexicans, this resulted in the real wages for the
Mexicans falling by roughly 25-35%, which meant that they could buy
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lesser amount of goods in 1995 as compared to previous years with the
same amount of money.

Financial Contagion
News from the MPC spilled over to other countries and affected their
economies, generating spill-over contagion effects. In what is now known
as the Tequila effect, the devaluation of the Mexican Peso also resulted
in South American countries suffering rapid currency depreciation and
stock market plunges. Argentina, Brazil and other neighbouring regions in
Latin America suffered from economic crises as a result of the domino
effect arising from the MPC. Investors had viewed these countries as being
vulnerable to a near term currency crisis similar to that of Mexico due to
their parallel characteristics such as the status of their balance of
payments, and thus sought to reduce their exposure in these Latin
American countries. This was exacerbated by the fact that mutual fund
companies had to sell their holdings in Mexican investments and other
investments in emerging economies in response to the huge amounts of
redemptions. The Argentine stock market dropped 40% and foreign
investors withdrew $1.5 billion out of Argentina in the aftermath of the
crisis (Goering, 1995). This resulted in these economies coming to a
standstill due to the lack of funds.

SOCIAL CONSEQUENCES
Household Impacts
The MPC had different effects on the different classes of people in Mexico.
Mexicans who were comparatively better educated and living in the city
areas suffered significantly larger declines in income as compared to their
unschooled counterparts living in the villages. This was due to the fact
that income per capita fell by up to 48% in financial services and about
17% for agriculture services. During 1995-1996, Household expenditures
fell by 15% on average with households reducing their consumption of
leisure activities, clothing, educational materials, public transport and
primary health care to allocate a higher proportion of their income to daily
necessities including food (Pereznieto, 2010, p. 15).

Employment
The crisis also resulted in lesser employment opportunities within Mexico.
Over one million people lost their jobs as firms closed down or downsized
due to the weak demand for goods and services. This led to widespread
poverty within the country with its extreme poverty rate increasing from
21% in 1994 to 37% in 1996 (Pereznieto, 2010, p. 10).

Healthcare
Households sought to mitigate the effects of a lower household income by
increasing their consumption of daily necessities at the expense of
healthcare consumption. This resulted in a reduced demand for health
services. Research has established a link between the crisis and infant
mortality rates. There was an increase in infant mortality rate during
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1995-1996, as the infant mortality rates climbed from 5 to 7 percent from
1995-1996, possibly the consequence of lower healthcare spending. As a
result of the austerity measures the government took to improve the
crisis, it directly led to a decrease in public spending on public sector
medical services which may have resulted in a lower standard of
healthcare during the period. (Pereznieto, 2010, p. 21).

OPPORTUNITIES

The devaluation resulted in new opportunities for local firms to partner

with companies from other countries, and avoid borrowing at high interest
rates. Due to the large number of businesses in Mexico that closed down,
the surviving firms were able to increase their market share as consumers
invariably shifted their choices to what was left. The weaker Peso also
resulted in a decrease in imports from other countries as few people could
afford imported goods, thus resulting in a change in demand for locally
produced goods which were more affordable for the Mexicans. At the
same time, they also had the opportunity to increase their exports as their
goods were now cheaper in foreign currency due to the weak Peso.
Moreover, firms with excess cash in Mexico also had the opportunity to
buy assets as significantly depressed prices. As many companies were
facing liquidity problems and were in dire need of cash to repay their
loans, this provided these companies the chance to buy assets at a lower
cost due to the desperation of these companies.
The weaker Peso also allowed MNCs to acquire Mexican assets at bargain
prices (Institute for Agriculture and Trade Policy, n.d.; Miller, 1995), while
also benefitting from the cheaper factors of production: for one, labour in
1995 was 40% lower in dollar terms than before (Springsteel, 1995). It is
thus clear that opportunities were aplenty for both local and foreign firms,
if they were in the right position and looking in the right directions.

POLICIES
As with most financial crises, the MPC impacted many major economies
worldwide, in not just the economic sense but politically and socially too.
As such, it was natural that the affected neighbouring countries had a
hand in providing measures to improve the situation and aid the Mexican
government in overcoming the crisis.

FLOATING OF THE PESO

Following the announcement of the devaluation of the Peso in 1994,
investors began pulling their investments from Mexico, leading to a
significant capital flight. In an attempt to restore stability, the Mexican
government decided to float the Peso. This action caused investors to
have the impression that Mexico no longer had a stable financial policy
and exchange rate, causing a speculative attack on the Mexican Peso.

US GOVERNMENT BAILOUT
By January 1995, the situation in Mexico was bleak. The US, a close
neighbour of Mexico, decided that it was in their best interest to help. The
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US concerns included: Mexicos status as the third-largest consumer of US
exports meant that the weak Mexican economy could lead to lower
imports of US products and hence possibly a loss of US jobs; the possibility
of political turmoil spilling over; as well as the possible influx of illegal
immigrants from Mexico.
The US quickly committed an $18 billion line of credit for Mexico on 2nd
January in the hope that investor confidence in Mexico could be restored,
and also to aid Mexico in settling some of its short-term debt. However,
this was insufficient to convince the investors. It was only with the USs
second proposal of $40 billion in loan guarantees that restored some
investor confidence. The package was jointly backed by the US
government, the International Monetary Fund (IMF), the Bank of
International Settlements (BIS) and other commercial banks. It would give
Mexico the USD it needed to repay the bonds it issued, with the US as
guarantor should Mexico default. In return for this bailout, the US enforced
contractionary policies on Mexico, while also requiring it to deposit its oil
revenues into a special account in the US as collateral. Mexico eventually
used about $13 billion of the borrowed funds to pay off its bonds, and was
able to issue more securities in international financial markets, albeit at
higher-than-normal interest rates (Musacchio, 2012). Finally, Mexico was
able to stabilize its economy, and even return its loans ahead of maturity.

AUSTERITY MEASURES
Apart from borrowing from the US, Mexico also implemented several
economic policies in the months after the Peso de-pegging so as to restore
investor confidence and mitigate further capital flight. In January 1995,
following the US announcement to extend a credit line to Mexico, Mexico
announced an economic stabilization package of a 7% minimum wage
increase, budget cuts of 7% and pledges to maintain the inflation rate at
19% (Robberson, 1995). Yet this was insufficient to restore confidence as
investors did not find this package credible. The Peso continued to
depreciate relative to the US dollar.
Mexico then announced a more stringent package of austerity measures
in March 1995: despite a predicted inflation rate of 42%, minimum wage
was only allowed to increase by 10%; sales tax was raised from 10% to
15%; gasoline prices were also increased by 35%, and electricity by 20%;
plus a 10% cut in government spending (Associated Press, 1995).
Although this puts a lot of pressure on the Mexican population, it
succeeded in stabilizing the Peso and, to an extent, restored investor
confidence in Mexico. The Peso strengthened significantly and remained
so for the rest of 1995 (Lane, 2002).

LESSONS FOR MNCS

Generally, MNCs are more buffered from financial crises than a typical
firm, due to their more diversified geographical scope of activity. Their
risks are not concentrated in one market but across many. In fact, a 20year research has quantitatively shown that MNCs usually survive when
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financial crises occur (Dikovaa, Smeetsb, Garretsenc, & Van Eesc, 2013).
As such, in addition to reflecting on the MPC, we will discuss some of the
general strategies MNCs could adopt to pull through financial crises in this
section.

LONG-TERM CURRENT ACCOUNT DEFICITS

MNCs should be alerted if the country it is operating in starts running a
long-term current account deficit, as was the case in Mexico prior to the
crisis, where the deficit reached $15 billion in 1991, and then almost
double of that by 1994 (Wheat, 1995). Tellingly, this also occurred before
the Asian Financial Crisis in 1997, in Thailand, Indonesia, Malaysia and
other affected nations (Corsetti, Pesenti, & Roubini, 1999, p. 79).
More importantly, a MNC should uncover the underlying transactions
driving the current account deficit. Firstly, it should be understood that a
current account deficit is driven by capital inflows i.e. foreign debt that
need to be paid back. Secondly, it is then natural that these funds be
spent on productive and profitable projects that will generate future
income for the country so as to be able to pay back its loans. In Mexico,
the foreign funds were used to finance domestic consumption (and not
investment) (Whitehead & Kravis, 1997), as well as short-term
government debt and to speculative rather than productive investment
(Wheat, 1995), which should have rang alarm bells. In short, a current
account deficit needs to be backed by fiscal discipline where the funds are
being wisely invested (Truman, 1996, p. 205). Any deviations should be
a sign of danger to MNCs, who may want to start hedging their risks or
reducing their investments in that nation.

POLITICAL CLIMATE
MNCs should always keep tabs on the political climates of the countries it
is operating in, and not just in terms of the severity of political turmoil. For
instance, even in politically-peaceful regions, an impending election could
still lead to the incumbent government implementing unsustainable
measures in an attempt to stimulate the economy so as to sway the
votes. An example of unsustainable policies would be that of Mexico fixing
its exchange rates despite massive downward pressures on the Peso
(though in Mexicos case, the political scene was already teetering on the
edge).
It is also important to recognise what threatens the major investors in the
region, as their actions play huge parts in determining the economic
movements of the nation in the near future. In Mexico, as aforementioned,
political tension had been high due to an upcoming election, pockets of
civil uprising, and even a presidential assassination, all of which clearly
mattered to investors as they started to pull their investments or demand
higher premiums. MNCs need to be more in touch with these investor
sentiments, particularly in key markets.

TAKE ADVANTAGE OF INTERNATIONAL NETWORK

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In a 20-year research, Dikova et. al found that with localized financial
crises such as the MPC, MNCs should employ their global network to
determine if sales can be transferred between subsidiaries, and assist the
affected subsidiary if possible, before considering the termination of local
operations (2013). Particularly, for local MNCs facing a currency crisis, it
had been observed in the same study that MNCs generally shift from local
sales to export markets, and such measures are effective short-term
response[s]. However, for this strategy to succeed, it is important that
the MNC has already assembled a diverse range of subsidiaries, has
sufficient resources, and is backed by its investors for the plan to work.

UNDERSTAND INTERNATIONAL BAILOUTS

MNCs need to understand that bailouts will not always be possible, and
then adjust their risk assessments accordingly. While the MPC was
eventually saved with a bailout package of $50 billion coordinated by the
US and the IMF (International Monetary Fund, 1995), it was not an easy
process as there was a general lack of enthusiasm among IMF member
countries and BIS central bankers (Wheat, 1995). Following the MPC, the
Global Financial Crisis also saw the collapse of Lehman Brothers, further
proving that no company is too big to fail, and that includes MNCs.

SEEK ALTERNATIVE OPPORTUNITIES

A MNC should not be deterred by the poor economic conditions in the
affected nation, and should instead see it as an opportunity for new
tactics. Some aforementioned1 possible opportunities include short-term
bargain hunting of inexpensive assets, ability to expand exports to
neighbouring markets, and long-term strategic investments (Gao &
Sarraf, 2009).
Of course, all of these strategies will still have to be subjected to
considerations of economic and political stability of the region and their
long-term sustainability for the company. It would be unwise to sacrifice
long-term growth for short-term gains.

GLOBAL AWARENESS
Finally, MNCs have to be aware that with a wider geographical scope, they
are also now just more exposed to crises in general. Financial crises far
from its home country could still affect one of its many subsidiaries. For
instance, the MPC affected the rest of Latin America significantly, which
meant investors who had assets in other parts of Latin American would
have been affected despite a lack of involvement in Mexico. Furthermore,
any powers of diversification has no doubt been diminished due to the
global contagion effect, as demonstrated during the Global Financial Crisis
where everyone was affected by a single crisis. MNCs will thus have to
dedicate more resources to keeping up with developments all over the
globe to minimize potential risks. That said, with increasing global trade
and capital flows, these measures have arguably become the new norm,
even for non-MNCs.
1 Please see p. 5 Opportunities for more details.
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CONCLUSION
All in all, the MPC can be said to be a typical currency crisis in which a
fixed currency can no longer be maintained, thus leading to speculative
attacks and capital flight. In Mexicos case, it was the interaction between
political instability and economic mismanagement that ultimately led to
the tragedy. The bulk of the responsibility arguably falls to the
government, given the lack of sensibilities in its pre-crisis actions.
In any case, the crisis was thankfully rescued by international aid, but that
does not diminish the great magnitude of losses suffered by the average,
innocent person and their families. The silver lining of the crisis, however,
are the lessons that governments and firms alike can now adopt to better
their operations, so that we may prevent a similar crisis in the future.

Lasting Global Impact

Though not a direct cause, the MPC certainly contributed to the ongoing
change in the international financial system where the idea of free(r)
markets was gaining traction. This was especially evident from the
increasing privatization and open-market reforms in the non-industrial
world as well as growing deregulation in the industrial world (Whitehead &
Kravis, 1997; Truman, 1996). Prices and exchange rates were allowed to
respond to shocks without government intervention. In the US, thenPresident Bill Clinton even stated that freedom and competition [were]
the answers [to] economic growth, and ... stability (US Department of
the Treasury, 1999). Interestingly, in the following years, after the Global
Financial Crisis, many would go on to reverse their positions and assert
that this trend of deregulation was in fact a key factor in causing the worst
financial crisis of our times.

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12

13
University of California San Diego. (2012). Political Economy of Devaluation: Mexico
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Retrieved
from
http://pages.ucsd.edu/~jlbroz/Courses/PS245/handouts/Mex1994.pdf
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http://www.multinationalmonitor.org/hyper/issues/1995/04/mm0495_06.html
Whitehead, J. C., & Kravis, M.-J. (1997). Lessons of the Mexican Peso Crisis. Council on
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http://sandovalhernandezj.people.cofc.edu/r11.pdf
Whitt, J. A. (1996). Mexican Peso Crisis. Economic Review, 81(1). Retrieved from
https://www.frbatlanta.org/research/publications/economicreview/1996/no1/vol81no1_mexican-peso-crisis.aspx

APPENDICES
Appendix A: Current and Capital Account Balance

Appendix B: Foreign Investment Flows in Mexico

13

14

Appendix C: Mexican Interest Rates over US Interest Rates

Appendix D: Charts of Mexicos Inflation Rate and Imports

from US

Source: Federal Reserve Bank of St. Louis

14

15

Appendix E: Mexicos Interest Rate Chart

Source: Federal Reserve Bank of St. Louis

Appendix F: Budgetary Expenditure of Mexico

15

16

Appendix G: USD-MXP Exchange Rate Change

Source: Federal Reserve Bank of St. Louis

Appendix H: Calculations to test the consistency of IFE 1

Year

19
90

199
1

US's Nominal Interest Rates

8.1

5.69

Mexico's Nominal Interest

Rate

34.
75
5.4
1
26.
65

19.2
77

US Inflation Rate (%)

Mexico's Inflation Rate (%)

Mexico Real interest rate

8.1

US Real Interest rate

2.6
9

USD-MXP % change
(according to IFE theory)

5.4
1

USD-MXP % change

14.
26

Data from World Bank, 2015

16

4.22
22.6
6
3.38
3
1.47
4.85
3
7.31
8

19
92
3.5
2
15.
62
3.0
4
15.
51

19
93
3.0
2
14.
93
2.9
7
9.7
5

199
4

1995

4.2

5.84

14.0
97

48.44

2.59

2.8

6.96

35

0.1
1

5.1
8

7.13
7

13.44

0.4
8
0.3
7
2.5
33

0.0
5

1.61

3.04

5.1
3

5.52
7

10.4

0.6
6

8.33

90.19
827

17

Appendix I: Economic Indicators for Mexico from 1993 to 1996

Source: Rabobank Economic Research

17