| There has been extensive discussion regarding the nature and causes of currency crises in general, and of the 1994 Mexican Financial crisis in particular.;Although the general opinion indicates that it was mostly due to bad economic policy administration and to the incompatibility between a quasi-fixed exchange rate regime and an expansionist credit policy, it is not clear what factor constituted the actual trigger for the crisis. It has been argued that the overvaluation of the exchange rate, herd behavior or increased political instability were the main factors behind the uprising of the crisis. Although all of these factors—and many more—played a major role in its development, it is not actually clear which factor actually led to the crisis in the fourth quarter of 1994. This is the subject we address in the present study.;In the first chapter we will describe the main developments that led to the Mexican 1994 crisis.;In Chapter II, we will make a brief review of the currency and financial crises literature, and we will try to reconcile our model with the different branches of the literature on the subject.;Later we develop a general equilibrium model with the inclusion of a central bank that minimizes a loss function. Within the model we find the conditions under which a country's government can become insolvent in foreign currency, a situation that we will regard as a “financial crisis”. We simulate the model for the Mexican economy for the 1991–1994 period, replicating the process that led to the crisis.;As a final exercise, we look for the threshold level of foreign reserves; that is, the level of reserves below which a crisis would have taken place in the Mexican Economy at any given date. As expected, 1994-IV is the only quarter for which reserves are below the threshold in the period of study, a result consistent with the timing of Mexico's crisis. Finally, interpretation of the results, conclusions, and further work proposals are presented. |
