Monetary Policy Case Study

The 1994 Devaluation of Mexican Peso and After

OR

Abstract:
From the 1940s till the mid-1970s, the Mexican economy enjoyed a strong growth. Vast petroleum and oil reserves were discovered in Mexico in the 1970s. The Mexican government expected that the income earned by exporting petroleum would help them balance their spending. But in 1976, Mexico's balance of payments showed a deficit. The government allowed the peso to float in 1976, which resulted in peso depreciation. Decreased demand and lower prices of petrol made the government devalue the peso in 1983. In 1994, Mexico signed the North America Free Trade Agreement (NAFTA) and expected its foreign trade to increase. But the growing current account deficit and large short-term borrowing led to another devaluation in December 1994. The devaluation of the peso affected trade with the US and other countries. The Mexican government tried to improve its economic conditions by taking advantages under the NAFTA. On January 1 st 2004, Mexico ranked eighth in the world among the largest trading countries.

Pedagogical Objectives:

• To discuss the effect of devaluation on the foreign trade of Mexico
• To discuss the relation between the exchange rate and the exports of Mexico.

Keywords : Mexican economy, Devaluation of the Mexican peso, North American Free Trade Agreement, Balance of payments, Current account deficit, Foreign exchange reserves, International Monetary Fund, President Ernesto Zedillo, Foreign trade balance, Exchange rate band, World Trade Organisation, Monetary Policy Case Study, Mexican exports, Pegging with the dollar, Free floating currency, Currency depreciation