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This paper discusses the role of a country’s fiscal stance in weakening the financial underpinnings of an open economy with a quasi-fixed nominal exchange rate, even where the overall fiscal deficit remains unchanged, or even narrows. The paper cites the role of expanding government operations in reducing the relative price of traded goods. A marked increase in government expenditure and taxation is associated with increased production costs, excess demand for nontraded goods, and a deterioration in the financial health of the traded goods sector. The paper demonstrates that, in contrast to the current economic situation in Mexico, the period leading to the 1994 crisis closely parallels these stylized facts.

Banks and Banking --- Macroeconomics --- Money and Monetary Policy --- Public Finance --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Fiscal Policy --- Studies of Particular Policy Episodes --- International Factor Movements and International Business: General --- Current Account Adjustment --- Short-term Capital Movements --- Open Economy Macroeconomics --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Macroeconomics: Consumption --- Saving --- Wealth --- National Government Expenditures and Related Policies: General --- Interest Rates: Determination, Term Structure, and Effects --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Monetary economics --- Public finance & taxation --- Finance --- Banking --- Bank credit --- Private savings --- Expenditure --- Real interest rates --- Commercial banks --- Money --- National accounts --- Financial services --- Financial institutions --- Credit --- Saving and investment --- Expenditures, Public --- Interest rates --- Banks and banking --- Mexico

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This paper provides a description and analysis of recent developments in international capital markets and an assessment of the prospects for private financing flows.

International finance. --- Banks and banking, International. --- Capital movements. --- Capital flight --- Capital flows --- Capital inflow --- Capital outflow --- Flight of capital --- Flow of capital --- Movements of capital --- Balance of payments --- Foreign exchange --- International finance --- International banking --- Offshore banking (Finance) --- Transnational banking --- Financial institutions, International --- International monetary system --- International money --- Finance --- International economic relations --- Banks and Banking --- Finance: General --- Investments: Bonds --- Macroeconomics --- Money and Monetary Policy --- Industries: Financial Services --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- General Financial Markets: General (includes Measurement and Data) --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- International Lending and Debt Problems --- Macroeconomics: Consumption --- Saving --- Wealth --- Financial Institutions and Services: Government Policy and Regulation --- Debt --- Debt Management --- Sovereign Debt --- Banking --- Monetary economics --- Investment & securities --- Financial services law & regulation --- Bank credit --- Domestic savings --- Bonds --- Money --- Foreign banks --- Financial institutions --- National accounts --- Capital adequacy requirements --- Financial regulation and supervision --- International capital markets --- Financial markets --- Banks and banking --- Credit --- Saving and investment --- Banks and banking, Foreign --- Capital market --- Asset requirements --- United States

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The present paper is intended to make a modest contribution to an under-standing of one small but important link in this complicated chain of interacting factors. It is a link that has often been ignored because strong simplifying assumptions have until very recently usually been made about it. We refer to the relation of exchange rate changes, export prices, and domestic prices. During the last few years a number of attempts have been made to examine the extent to which exchange rate changes were "passed through"; that is, the extent to which a given depreciation in the U.S. dollar, for example, resulted in a corresponding decline in the price of U.S. exports in foreign currencies. However, the possibility that a change in the exchange rate might also alter the relationship between the export price and the domestic price of a given product, expressed in the same currency, has been almost completely ignored. The assumption made, implicitly by most past writers in the theory of international trade and more recently explicitly by advocates of the monetary approach to the balance of payments, has been that the "law of one price" applies to shipments destined for home markets and for foreign markets.

Exchange rate pass-through. --- International finance.