Staff Report 212

The Balance of Payments and Borrowing Constraints: An Alternative View of the Mexican Crisis

Andrew Atkeson | Federal Reserve Bank of Minneapolis Consultant and UCLA
José-Víctor Ríos-Rull | University of Pennsylvania, UCL, CAERP, CEPR and NBER

Published May 1, 1996

In this paper we develop a model in which a country faces a balance of payments crisis if constraints on its international borrowing bind. We use the model to describe the dynamics of the trade balance, capital account, and balance of payments of a country that borrows to finance consumption following sweeping macroeconomic and structural reforms and then hits constraints on its international borrowing. We compare the predictions of this theoretical example with events in Mexico from 1987 through 1995.

Published In: Journal of International Economics (Vol. 41, No. 3-4, December 1996, pp. 331-349)

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