In 1995 Mexico experienced its largest contraction of GDP since the early 20th century. I propose a simple mechanism to partially account for the collapse of economic activity: distortions on consumption and leisure caused by fiscal policy. The contraction of GDP was preceded by a financial...

Total factor productivity (TFP) falls markedly during financial crises, as we document with recent evidence from Mexico and Asia. These falls are unusual in magnitude and present a difficult challenge for the standard small open economy neoclassical model. We show in the case of Mexico's 1994-95...