A self-fulfilling model of Mexico's 1994-1995 debt crisis

Harold L. Cole, Timothy J Kehoe

Research output: Contribution to journalArticle

146 Citations (Scopus)

Abstract

This paper explores the extent to which the Mexican government's inability to roll over its debt during December 1994 and January 1995 can be modeled as a self-fulfilling debt crisis. In the model there is a crucial interval of debt for which the government, although it finds it optimal to repay old debt if it can sell new debt, finds it optimal to default if it cannot sell new debt. If government debt is in this interval, which we call the crisis zone, then we can construct equilibria in which a crisis can occur stochastically, depending on the realization of a sunspot variable. The size of this zone depends on the average length of maturity of government debt. Our analysis suggests that for a country, like Mexico, with a very short maturity structure of debt, the crisis zone is large and includes levels of debt as low as those in Mexico before the crisis.

Original languageEnglish (US)
Pages (from-to)309-330
Number of pages22
JournalJournal of International Economics
Volume41
Issue number3-4
DOIs
StatePublished - Jan 1 1996

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Mexico
Debt crisis
Debt
Maturity
Government debt
Government
Sunspots
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Keywords

  • Debt crisis
  • Mexico
  • Sunspot

Cite this

A self-fulfilling model of Mexico's 1994-1995 debt crisis. / Cole, Harold L.; Kehoe, Timothy J.

In: Journal of International Economics, Vol. 41, No. 3-4, 01.01.1996, p. 309-330.

Research output: Contribution to journalArticle

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