Expectations, the business cycle and the Mexican peso crisis

The 1994-95 'peso' crisis did not display characteristics which allow it to be easily captured by traditional crisis models. Models based on Minsky's financial fragility hypothesis offer more persuasive accounts but have been supported by relatively little direct empirical evidence. This paper provides such evidence, with particular attention being paid to the role of domestic financial liberalisation in the process. Minsky's hypotheses about the evolution of expectations over the business cycle are tracked using business survey data. In addition, crisis indicators are constructed, reflecting the changing vulnerability of the economy to shocks. The findings support a Minskyian interpretation of the crisis.