Berry Wilson, Anthony Saunders, Gerard Caprio, Jr.
ABSTRACT
The sharp 1994-1995 Mexican peso devaluation was followed by a financial-sector
crisis, forcing the Mexican government to retake control of several banks
and to grant substantial assistance to many other banks. This paper uses
daily stock price data to test several hypotheses concerning the impact
of devaluation. First, we use event-study methodology to test whether some
sectors of Mexican economy were 'devaluation-gaining' while other sectors
were 'devaluation-losing.' Second, we test the linkage between the devaluation
and the financial-sector crisis that ensued. Specifically, we test whether
devaluation shocks were transmitted through the liability side versus the
asset side of bank balance sheets. Our results suggest that governments
should consider putting minimum guidelines on bank portfolios.
Saunders: (212) 998-0711 asaunder@stern.nyu.edu
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