Currency Crises in Mexico 1990-2009 : An Early Warning System Approach

The Global Financial Crisis (GFC) has affected many countries including Mexico. The exchange rate depreciated sharply in the fall of 2008. This chapter investigates the experience of Mexico with currency crises since 1990. We estimate an Early Warning System, consisting of an ordered logit model to include the severity of currency crises, and a factor model to cope with the large number of crisis indicators. We find that Mexico's currency crises are driven primarily by domestic economy, external economy and debt indicators. Ex ante forecasts for 2008-2009 do not produce a currency crisis in late 2008, in sharp contrast with reality