General Motors Operations in Mexico, and the Peso Crisis

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1. Do you think that the peso had fallen far enough as of December 22 or that it would continue to lose value? Is it the predicted exchange rate usually accurate?

No, I don’t think peso had fallen far enough to an appropriate value. According to the PPP theory which relates equilibrium changes in the exchange rate to changes in the ration of domestic and foreign prices, the exchange rate in Mexico should depreciate to offset the high inflation rate. Based on the inflation data from 1990 to 1994, the exchange rate changes should be:


So it would continue to lose value a little bit.

It is not usually accurate because besides inflation rate, there are many other factors that have an influence on the exchange rate, such as money supply, government policies, etc. We don’t include everything here.

2. Could the peso float have been forecasted?

The peso float could have been forecasted. Balance of payment was getting worse and worse since 1990 and the trade and current account deficit had an increasing trend these years.

Inflation: the inflation rate reached 70% from 1990 to 1994, which indicated that Mexico was suffering from a heavy inflation problem then. Inflation could lead to the problem of less export and deficit in the balance of payment.

Money supply: compared to only 39% increase in US, money supply in Mexico increased by 300% from 1990 to 1994.

The above economic indicators show that the economy of Mexico before and during the period that it announced its exchange policy was not satisfying. The fear of domestic people and foreign investors could be the reason that people had forecasted the policy and made move, which leaded to the peso crisis of Mexico economy at that time.

3. What alternatives were available to the Mexican government for dealing with its balance-of-payment problems?

Besides allowing its peso float and making it devaluation, the...
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