Seigniorage and the Mexican Financial Crisis

Fiscal imprudence and political wavering are frequently cited as the primary causes of Mexico's financial crisis of the 1980s. While these views have merit, they tend to overlook the seigniorage from money creation. Using the Cagan model and an econometric procedure that does not rely on any particular formation of expectations, we find evidence that the government used seigniorage to pursue a revenue-maximizing inflation tax. The results have two implications. First, monetary management had a larger impact on the crisis than suggested in the literature. Second, an analysis of monetary management may yield new insights into the causes and consequences of the crisis