Document the trend in Mexico’s key economic indicators, such as the balance of payments, the exchange rate, and foreign reserve holdings, during the period 1994.1 through 1995.12.
a. The Mexican peso was pegged to the US dollar
i. Made Mexico attractive destination for foreign Capital and lead to surge in portfolio investment
ii. Flows initially helped to support Mexico’s economic reforms, but later undermined them
b. The peso’s appreciation combined with unilateral trade liberalization fed a surge in imports, which outpaced exports
i. Trade deficit coincided with foreign investment boom of the US during the early 1990s
ii. Allowed Mexico to cover growing trade imbalance and run
unprecedented current account deficits
c. Primary component of Mexico’s anti-inflationary policy
was its exchange rate regime
i. Exchange rate regime was effective in curbing inflationary pressures
ii. But resulted in the appreciation of the peso