Mexico's Financial Sector Crisis: Propagative Linkages to Devaluation

The sharp 1994 Mexican peso devaluation was followed by a financial-sector crisis, forcing the Mexican government to retake control of several banks and to grant substantial assistance to many others. This paper tests several hypotheses concerning the impact of devaluation. First, event-study methodology is used to test whether some sectors of Mexican economy were `devaluation-gaining' while others were `devaluation-losing'. Second, we test whether devaluation shocks were transmitted to the financial sector through the liability side versus the asset side of bank balance sheets. Our results indicate the importance of asset diversification.