Recently, Mexico experienced large-scale trade deficits,depletion of foreign reserve holdings and a major currencydevaluation in December 1994, followed by the decision to freelyfloat the peso. These events also brought about a severe recessionand higher unemployment in Mexico. Since the devaluation, however,the trade balance has improved. Investigate the Mexican experiencesin detail and provide the following in your answer:
(a) document the trend in Mexico’s key economic indicators, suchas the balance of payments, the exchange rate, and foreign reserveholdings, during the period 1994.1 through 1995.12.;
(b) investigate the causes of Mexico’s balance of paymentsdifficulties prior to the peso devaluation;
(c) discuss what policy actions might have prevented ormitigated the balance of payments problem and the subsequentcollapse of the peso
(d) derive lessons from the Mexican experience that may beuseful for other developing countries.
In your answer, you may identify and address any other relevantissues concerning Mexico’s balance of payment problem.International Financial Statistics published by IMF provides basicmacroeconomic data on Mexico.
