Graphical and statistical effects of currency crisis with real world examples

Published by: mike 2009-01-08

I need some statistical results of the effects of currency changes like devaluation on international trade eg on Metico or other countries that had such crisis. How the trade values changed during currency crisises. The results should be explained graphically too. Custom works more than welcome. I`ll tip very well (3 digits)if the answer meets my expectations.

Is the last Argentinian crisis a good example that can be used in the answer (default and devaluation of 300%)? What kind of info are you expecting to receive in the answer? Regards. livioflores-ga.

I have found some case studies discussing and illustrating figures that led to a currency crisis. But just to make sure I need to clarify these things: - When you say "effects" are implying an "after the fact" scenario? - Or would theories supported by figures that led to a particular currency crisis is actually what you require? Thanks!

I would like to have the statistical and graphical analysis of the changes in trade values when such crisis like Argentina had. Year by year, how were the number of imports and exports before and how was it after the crisis. How is that compared to the thoretical results. I need an analysis of the effects of the crisis with the real world examples, statistically and graphically. I hope I could make myself clear on that.

Hi, thanks for the question. I have provided you with information related to your query in this order: 1. Macroeconomic backround information on devaluation and the case of Mexico specifically. 2. Statistical data on devaluation in general and in regards to Mexico especially. 3) Graphical data. The statistical and graphical information relates primarily to the concept of the "J-Curve" which expresses the correlation between devaluation and a country's trade balance. I will define this concept and then provide evidence as to how the J-Curve can be used to express the effects of devaluation in Mexico specifically. If you need me to clarify, please let me know. -------------------------------------------------------------------------------- 1) Background Information: A. General Info: Conventional macroeconomic analysis of devaluation- its causes and effects: A case study of a currency crisis: The Russian default of 1998 Federal Reserve Bank of St. Louis 84, no. 6 (Nov/Dec 2002): p. 7-17 Full-text source: ABI_INFORM_FT "A currency crisis is defined as a speculative attack on country A's currency, brought about by agents attempting to alter their portfolio by buying another currency with the currency of country A.2 This might occur because investors fear that the government will finance its high prospective deficit through seigniorage (printing money) or attempt to reduce its nonindexed debt (debt indexed to neither another currency nor inflation) through devaluation. A devaluation occurs when there is market pressure to increase the exchange rate (as measured by domestic currency over foreign currency) because the country either cannot or will not bear the cost of supporting its currency. In order to maintain a lower exchange rate peg, the central bank must buy up its currency with foreign reserves. If the central bank's foreign reserves are depleted, the government must allow the exchange rate to float up-a devaluation of the currency This causes domestic goods and services to become cheaper relative to foreign goods and services. The devaluation associated with a successful speculative attack can cause a decrease in output, possible inflation, and a disruption in both domestic and foreign financial markets." Effects of devaluation: http://www.theallineed.com/ad-business-4/business-024.htm "But this is all in an idealized country which really exists nowhere. In reality, devaluation tends to increase inflation (=the general price level) and thus have an adverse macro-economic effect. Six mechanisms operate immediately following a devaluation: The price of imported products goes up. The price of goods and services, denominated in foreign exchange goes up. An example: prices of apartments and residential and commercial rentals is fixed in DEM. These prices increase (in terms of MKD) by the percentage of devaluation - immediately! The same goes for consumer goods, big (cars) and small (electronics). Exporters get more MKD for their foreign exchange (and this has an inflationary effect). People can convert money that they saved in foreign exchange - and get more MKD for it. A DEVALUATION IS A PRIZE GIVEN TO SPECULATORS AND TO BLACK MARKET OPERATORS. Thus, the cost of living increases. People put pressure on their employees to increase their salaries. Unfortunately, there is yet no example in history in which governments and employers were completely successful in fending off such pressures. Usually, they give in, wholly or partially." ------------------------------------------------------------------------------- B. Mexico Devaluation Crisis Info: Mexico's Financial Sector Crisis: Propagative Linkages to Devaluation The Economic Journal, Vol. 110, Issue 460, January 2000 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=233429 Background on Mexico's devaluation crisis: "The sharp 1994 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 others. This paper tests several hypotheses concerning the impact of devaluation. First, event-study methodology is used to test whether some sectors of Mexican economy were 'devaluation-gaining' while others were 'devaluation-losing'. Second, we test whether devaluation shocks were transmitted to the financial sector through the liability side versus the asset side of bank balance sheets. Our results indicate the importance of asset diversification." THE MEXICAN ECONOMY AND THE BORDER REGION SINCE DEVALUATION By Dr. Jim Peach, Professor of Economics, New Mexico State University http://www.nmsu.edu/~frontera/old_1996/oct96/1096econ.html "In December 1994, the Mexican economy entered its worst recession since the great depression of the 1930s. During 1995 Real Gross Domestic Product (RGDP), the broadest measure of economic activity, declined by 6.94 percent; inflation, as measured by the Consumer Price Index (CPI) reached 51.97 percent; the open unemployment rate reached levels not previously recorded by the current statistical system; the peso which had traded at 3.3 to the U.S. dollar in early December 1994 was trading at 7.7 to the dollar by December 1995; and, the index of Mexican stock prices (Bolsa de Valores) declined by more than a third in the first months of 1995." Mexico today: bouncing back from the peso crash - prospects for growth Business Economics, July, 1999 by Jonathan Heath http://articles.findarticles.com/p/articles/mi_m1094/is_3_34/ai_55294824 Causes of the devaluation: "The Mexican government was criticized for making bad policy decisions in 1994, which eventually led to the peso crash. However, the weakness of the banking system constrained the government's maneuvering room and the excessive growth in credit was probably the main reason leading up to the devaluation in December." Defecits can cause devaluation: http://lanic.utexas.edu/cswht/paper2.html "Devaluation of the Mexican peso resulted from familiar causes: a sizeable and growing current account deficit (i.e., an excess of imports over exports), over-expansion of the money supply, and over-reliance on short-term borrowing." http://www.polyconomics.com/searchbase/g2-10-95.htm "There was no grand conspiracy here -- no men with long cigars sitting about and plotting larceny. It is rather more like the Kansas sunflower conspiracy. In the morning, the sunflowers face east, in the evening they face west. They never speak to each other, but move with the sun. In this case, the guiding force was the idea that the peso had to be devalued, because, as Ortiz told the Congress: "The deficit in the current account was at almost a yellow warning light in the international financial reports and in the greater part of the foreign stock exchanges. As we all know, on the 4th November, upon analyzing the latest presidential report, we pointed out that the peso was overvalued." Of course it was not. A government's promise to its people cannot be overvalued." The effect of devaluation on trade: "In 1983 a trade balance surplus was achieved through a small increase in exports and a tremendous restriction on imports. In 1995 only a small initial drop in imports was observed, while virtually all of the adjustment came through export growth. By January 1996, import levels were back to predevaluation levels. In large, import growth was due to the high import content of exports, while the importation of capital and consumer goods dropped substantially. Export growth proved to be the savior of many firms throughout 1995-96, given the huge drop in domestic activity. In order to expand installed capacity in these firms, investment outlays grew at double-digit rates. By mid-1996, many manufacturing sectors with a high export bias reached new historical production peaks. However, salaries suffered a very large contraction, reducing purchasing power by a large margin for most of Mexican society. Although unemployment increased by a large margin, it was contained by the tremendous amount of wage flexibility. Many firms gave no salary increases at all during 1995 while inflation increased 52 percent." Devaluation can increase export advantages by decreasing real wages: http://www.polyconomics.com/searchbase/g2-10-95.htm "We really do not have to speculate on why this was happening. On January 23, Mexico's Finance Minister, Guillermo Ortiz, told the Chamber of Deputies in Mexico City that the international financial institutions endorsed the idea in the months leading up to the devaluation, and so did "stockbrokers and analysts." My first thought upon hearing of the devaluation was that the export industries of Mexico had brought pressure on the government -- to gain a bit of an export advantage by lowering the real wages of the Mexican work force. This is exactly what the opponents of the North American Free Trade Agreement had predicted would occur." http://www.mexico-trade.com/macro.html "To date, despite recession and instability, foreign investment flows have improved. In the first semester, new foreign inflows reached US$3.12 billion. The Zedillo administration continues to emphasize a commitment to increase direct foreign investment by new privatization and property ownership laws. This will help ameliorate the bitterness of the austerity program and the harsh conditions imposed by the Clinton administration and the IMF in order to guarantee the success of the US$52 billion bailout package. The strictness is evident in the rubrics of monetary and fiscal policy" http://www.mexico-trade.com/macro.html "The first quarter results place special emphasis on the reversal of the trade deficit as a sign that the strict measures of austerity and devaluation are "working out." Thus, the Zedillo administration is citing success on the basis that the current account deficit, the alleged culprit behind the devaluation and the ensuing financial and exchange-rate crisis, has been transformed into a balance. On the other hand, a sharp drop in demand for foreign goods is inevitable in an economy characterized by recession and rising unemployment. So construed, a current account surplus is not necessarily a reflection of a healthy economy. For instance, the auto industry, a standard barometer of economic activity, has experienced its worst crisis in seven years: first quarter sales are down 63.7% in comparison to 1994 -even despite the advantages of lower trade barriers due to phase out periods in NAFTA. It is expected that 30% of all dealerships will close down. This is equivalent to a net loss of 75,000 lots." Summary: An unstable banking system largely contributed to the devaluation in 1994. Its effect on trade was moderate, however, because the NAFTA kept exports from plunging and preserved an incentive for foreign investiment (although NAFTA may have contributed to the devaluation itself). The U.S. also provided significant foreign aid after the crash. The exports that were lost quickly bounced back a couple of years after the peso-crash. -------------------------------------------------------------------------------- 2) Statistical Analysis; The J-Curve and devaluation: J-CURVE The Economist http://www.economist.com/research/Economics/alphabetic.cfm?TERM=J%2DCURVE#J%2DCURVE "The shape of the trend of a country?s trade balance following a DEVALUATION. A lower EXCHANGE RATE initially means cheaper EXPORTS and more expensive IMPORTS, making the current account worse (a bigger DEFICIT or smaller surplus). After a while, though, the volume of exports will start to rise because of their lower PRICE to foreign buyers, and domestic consumers will buy fewer of the costlier imports. Eventually, the trade balance will improve on what it was before the devaluation. If there is a currency APPRECIATION there may be an inverted J-curve." Statistical analysis of Mexico using the J-Curve: Mexico in Crisis http://www.dtic.mil/doctrine/jel/research_pubs/crisis.pdf Statistical and graphical analysis using the J-Curve (cites many countries as examples, including Mexico): http://faculty.econ.nwu.edu/faculty/christiano/362/w2003/lect12.pdf East Asia analysis using the J-Curve http://www.economicsbulletin.uiuc.edu/2003/volume5/EB-03E00003A.pdf ------------------------------------------------------------------------------ 3) Graphical Analysis: Mexico: Inflation graph from PBS http://www.pbs.org/wgbh/commandingheights/lo/countries/mx/mx_inf.html Mexico: Trade Volume graph from PBS http://www.pbs.org/wgbh/commandingheights/lo/countries/mx/mx_tvol.html This article analyzes the Mexican devaluation crisis. It includes graphical analysis: Federal Reserve Bank of Dallas "The Mexican Economy Since the Tequila Crisis," (Gruben, November, 2000) www.dallasfed.org/research/indepth/2000/id0010.pdf Plenty of graphical analysis of Mexico's trade indicators in this study of NAFTA: Study on the Operation and Effect of the North American Free Trade Agreement http://usinfo.org/trade/nafta/chap2_1.stm.html Lots of graphs in this comparitive analysis of economics in Latin America: Neoliberalism, Investment and Growth in Latin America By Jayati Ghosh & C. P. Chandrasekhar http://www.freeindiamedia.com/economy/12_jan_04_economy.htm ------------------------------------------------------------------------------- Additional Resources: Mexico: Economic Timeline from PBS http://www.pbs.org/wgbh/commandingheights/lo/countries/mx/mx_economic.html Trade Policy Timeline from PBS http://www.pbs.org/wgbh/commandingheights/lo/countries/mx/mx_trade.html NAFTA and after; Slouching towards the Free Trade Area of the Americas by Peter Costantini http://www.speakeasy.org/~peterc/nafta/nafta5.htm The Case for Mexico's Rescue: The Peso Package Looks Even Better Now http://www.foreignaffairs.org/19960501facomment4196/bradford-de-long-christopher-de-long-sherman-robinson/the-case-for-mexico-s-rescue-the-peso-package-looks-even-better-now.html http://www.economist.com/countries/Argentina/ http://www.economist.com/countries/Mexico/ Thailand case study http://www.ser.tcu.edu/2002/111-122%202002.pdf Economics Links http://teachers.ausd.net/socialsci/EconomicsLinks.html Other answers that may be helpful: International trade and economics http://www.answers.google.com/answers/threadview?id=336657 international money and finance http://www.answers.google.com/answers/threadview?id=344236 ------------------------------------------------------------------------------- Google Search Strategy: devaluation effects, trade -with narrowing terms mexico statistical graph J-Curve Also used the econ-lit database. Thank you again for your question. Please let me know if you need any clarification of my response. Regards, Anthony (adiloren-ga)

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sorry- I meant to include these under the statistical analysis section: This document is key. It gives all of the statistics for the major trade indicators comparatively from 1992-1994. Note: The peso crash was in 1994. U.S. DEPARTMENT OF STATE MEXICO: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES BUREAU OF ECONOMIC AND BUSINESS AFFAIRS http://dosfan.lib.uic.edu/ERC/economics/trade_reports/1994/Mexico.html "The new Zedillo Government's decision in mid-December to devalue and subsequently to float the peso provoked a deep financial crisis in Mexico and highlighted the vulnerabilities of the Mexican economy. Principal among these were the overvalued peso, excessive trade and current account deficits, and undue reliance on short-term capital to finance the government and current account deficits. The December crisis has led the Zedillo Government to reinforce its policy commitment to economic reform and adjustment and to enter into discussions with the International Monetary Fund (IMF) on a new macroeconomic stabilization program supported by an IMF stand-by arrangement. The government has also promised greater foreign access in key sectors such as ports, railroads, satellites, telecommunications and financial services as part of its renewed commitment to economic reform and market opening." The Impact of the Peso Devaluation on Bankers' Access to Mexico under NAFTA by Peter S. Rose http://lanic.utexas.edu/cswht/paper4.html "The impact of the peso's decline on the Mexican and U.S. economies has been well publicized: * The influx of cheaper Mexican imports has resulted in the slowing of some U.S. business production and sales. * U.S. exports to Mexico have generally declined. * Interest rates in Mexico have risen sharply. * Business activity in Mexico has slowed. * Unemployment in Mexico has increased dramatically, particularly among those industries relying on dollar-denominated raw materials and debt capital." Mexico Trade Overview: http://www.foreign-trade.com/reference/reviews.cfm?report=11145020.shtml "Despite a major currency devaluation in late 1994, Mexico's import market is recovering. Indeed, Mexico must import many goods in order to fuel its economy and feed its people. Mexico with its large population and liberalized import policy has become an attractive market. Growing imports are being driven by the increasing openness of the Mexican market, the rapidly growing population, and an improving affluence and changing taste of its consumers." "During the period from January 1995 through the first half of 1996 Mexico struggled to cope with the December 1994 devaluation of the peso and the economic difficulties which followed. In the later part of 1996 and in 1997 Mexico experienced a solid recovery." "Total Mexican imports in 1996, according to the Bank of Mexico, amounted to US$89.5 billion, of which approximately 80 percent were intermediate goods, 10 percent capital goods, and 7 percent consumer goods. In 1996, the U.S. accounted for 76 percent (US$56.8 billion) of imports, followed by Europe (9 percent), Japan (5 percent), Canada (2 percent), according to the U.S. Department of Commerce. Total Mexican imports in 1997 should reach US$107 billion, and is forecasted at US$124 billion in 1998." Here are the World Bank statistics and indicators for Mexico: http://devdata.worldbank.org/external/CPProfile.asp?SelectedCountry=MEX&CCODE=MEX&CNAME=Mexico&PTYPE=CP You can search for indicators and statistics here: World Bank http://devdata.worldbank.org/data-query/ Here is another good article with some graphs: http://credpr.stanford.edu/pdf/credpr110.pdf I'll update this a little further if I find anything else that may be useful.

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Hi, I realize that I have thrown a lot at you and this may be a little hard to process. I found an article that may have everything that you require in a very synthesized format. I have excerpted passages from the article below. There are many graphs of Mexican and U.S. trade values that cover the time of the devaluation and much statistical analysis of the role of the devaluation and of NAFTA on trade between the U.S. and Mexico. I also included a study specific to the 1994 devaluation with graphs and statistical analysis that I think should be very useful. I hope this helps. ------------------------------------------------------------------------------ The article notes that the devaluation of the peso decreased U.S. exports to Mexico and increased U.S. imports from Mexico: http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1 "# A sudden major decline in the value of the peso at the end of 1994 (which reduced U.S. exports to Mexico and increased U.S. imports from Mexico), # An associated harsh Mexican recession in 1995 (which lowered Mexico's demand for all countries' exports, including those of the United States)" This is interesting- the U.S. trade balance with Mexico plunged around the time of the Mexican devaluation: http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1 "A year after NAFTA went into effect, the U.S. trade balance with Mexico dropped suddenly from near zero to a substantial deficit. It recovered partially over the next few years but then began declining again to record deficits. That decline has continued ever since." "The balance of trade in goods with Mexico has declined substantially since NAFTA went into effect. Its descent actually started almost two years before NAFTA, but the balance did not decline much until a year after the agreement went into force. It recovered slightly from 1995 through 1998 before resuming its descent." The article argues that NAFTA did not cause the devaluation but that the devaluation did effect trade (2 graphs are included to illustrate this point): http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1 "Both were severe. From the last quarter of 1994 to the first quarter of 1995, the real value of the peso (the value adjusted for inflation in the United States and Mexico) dropped by one-third (see Summary Figure 2). In the recession, seasonally adjusted real Mexican GDP declined by 9.7 percent (see Summary Figure 3). Because of their magnitudes, both of those events could be expected to have had a substantial influence on trade. Their occurrence just a year after NAFTA went into effect might lead some people to suspect that the agreement played a role in causing them or making them worse. However, that is not the case." Causes of the devaluation: http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1 "A number of factors converged to cause the financial crisis that led to the peso crash and Mexican recession of the mid-1990s. They include the market's nervousness about the historically high real value of the peso; considerable political turmoil in 1994 (an armed rebellion in the state of Chiapas, a presidential election and change of administration, two major political assassinations, and the resignation of the Deputy Attorney General claiming a coverup in the investigation of one of the assassinations); rising interest rates in the United States; well-intended Mexican government policies that ended up exacerbating the crisis; and the market's memories of past Mexican government actions in somewhat similar situations that had hurt investors. In response to those factors, net foreign investment in Mexico plummeted in 1994, causing interest rates to rise and putting severe downward pressure on the value of the peso. The Mexican central bank ran out of the foreign exchange reserves required to keep the peso from falling and was forced first to devalue it and then to let it float. Interest rates skyrocketed, the government and private sector were unable to borrow from abroad, and the country went into a severe recession." The devaluation contributed to the increase in the trade defecit: http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1 "The reason for the substantial fall in the trade balance with Mexico since NAFTA took effect lies primarily in fluctuations of the U.S. and Mexican business cycles. The balance went abruptly into substantial deficit at the end of 1994 and the beginning of 1995 because of the severe Mexican recession and, to a much lesser extent, the peso crash. The recession significantly reduced Mexican demand for U.S. exports, and the peso crash further reduced that demand slightly and increased U.S. imports from Mexico slightly." NAFTA's effect on trade was minimal: http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1 "CBO estimates that roughly 85 percent of the increase in U.S. exports of goods to Mexico between 1993 and 2001, and 91 percent of the increase in U.S. imports of goods from Mexico over the same period, would have taken place even if NAFTA had not been implemented. In addition, the major fluctuations in exports and imports would have been similar to what actually occurred." U.S. Trade in Goods with Mexico (Graph) (As a percentage of U.S. GDP) 1970-1998 http://www.cbo.gov/showdoc.cfm?index=4247&sequence=1 --------------------------------------------------------------------------------- Here is the other article- it really focuses of the economic indicators related to the currency crisis: OECD The 1994 Mexican crisis: were signals inadequate? Pierre Beziz - G rald Petit http://www1.oecd.org/std/mexlipap.pdf