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MEXICOS BALANCE OF PAYMENTS PROBLEM Recently, Mexico experienced large-scale trade deficits, depletion of foreign reserve...

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Finance

MEXICOS BALANCE OF PAYMENTS PROBLEM

Recently, Mexico experienced large-scale trade deficits, depletion of foreign reserve holdings and a major currency devaluation in December 1994, followed by the decision to freely float the peso. These events also brought about a severe recession and higher unemployment in Mexico. Since the devaluation, however, the trade balance has improved.

Investigate the Mexican experiences in detail and write a report on the subject. In the report, you may:

(a) document the trend in Mexicos key economic indicators, such as the balance of payments, the exchange rate, and foreign reserve holdings, during the period 1994.1 through 1995.12.;

(b) investigate the causes of Mexicos balance of payments difficulties prior to the peso devaluation;

(c) discuss what policy actions might have prevented or mitigated the balance of payments problem and the subsequent collapse of the peso; and

(d) derive lessons from the Mexican experience that may be useful for other developing countries.

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