Peso Devaluation Research Articles

The Impact of Mexico's Currency Devaluations on Revenue from U.S. Tourists

U.S. visitors to Mexico increased by 120% between 1970 and 1987. Mexico's booming travel industry has increased nominal revenues from the U.S. by 375% and expenditures per tourist by 116% during this time period. Adjusting these data by a ratio index gives a more vivid picture of the impact of inflation and the peso devaluations over time. Trends in U.S. tourist expenditures to Mexico are shown to parallel exactly the movements of the ratio index bases on relative prices and exchange rates. Our modified regression analyses indicate that both real U.S. disposable income and the ratio index are excellent independent variables for the purpose of predicting number and expenditures of U.S. tourists to Mexico. Further, U.S. tourism numbers and expenditures are elastic with respect to each of these variables. The inconsistency between these results and past estimate may be the result of multucollinearity or autocorrelation in their data.

The impact of the 1982 Peso devaluations on Maquiladora profits

The primary purpose of this article is to study the effect the February and August 1982 peso devaluations had on the profitability of U.S. maquiladora investments by using stock-price returns data: stock prices are assumed to have captured the market's perception of how the peso shocks affected the value (and thus the expected future cash flows) of American maquiladora firms in 1982. This approach eliminates the need to trace all the likely short-term and long-term effects the peso changes had on the profitability of maquiladora operations. More importantly, it can be used to estimate the extent by which the wealth of maquiladora owners increased or decreased following the peso devaluations. This approach has been employed extensively in the finance literature to study the impact of exogenous shocks on the value of publicly-held firms, and, in particular, it has been recently used to study the stock market response to Mexico's economic crisis in 1982. Smirlock and Kaufold (1987) review some of this research and show that the stock prices of U.S. banks with financial exposure to Mexico were negatively affected by the 1982 peso devaluations. A second purpose of this study is to extend Smirlock and Kaufold's research by focusing on the stock values of nonfinancial firms after the February and August peso shocks. A working hypothesis is that the devaluations increased the value of U.S. nonfinancial firms with investments in Mexico.

A comparison of border and non‐border banks in Texas

Because of Mexico's economic problems, some people have asserted informally that the banks in the border area have an excess of cash because of the inflow of capital-flight money from Mexico. Others have contended that the increased movement of illegal drugs through the Texas-Mexican border area is a cause of a more deposit-rich banking industry in the region. If these contentions are true, border banks should have a low loan-to-deposit ratio, low return on assets and tight capital adequacy relative to non-border banks. These conditions would be expected because of the peso devaluation and other factors that led to relatively slow economic growth in most border areas during the study period. These contentions have never been tested systematically. If the contentions prove to be true, there could be important implications for the use of locally generated funds for economic development. Are bankers sending funds outside the area, keeping local rates high? Are bankers being too conservative in granting local loans? Are local banks on weaker economic footing than banks elsewhere? Does capital funding move from the border to non-border areas? Are banks just as profitable in the border area as elsewhere? If the contentions prove to be false, we would at least have learned something valuable about bank behavior in the border area: that is, proximity to Mexico is not a crucial factor in a bank's operations. This study attempts to shed some light on the nature of bank operating characteristics in the border area and provide some answers to the contentions mentioned above. The purpose of the study is to identify the differences in operating ratios between banks situated on the border of Texas and Mexico and banks elsewhere in Texas.

A test of purchasing power parity: Texas Border retail trade and the value of the Peso 1976–1987

The peso devaluations of 1982-1983 caused a severe disruption in the Texas economy along the Texas-Mexico border. The proximate cause of these devaluations was the disparity between the inflation rates in the United States and Mexico. This disparity was accompanied by capital flight from Mexico as Mexican citizens attempted to protect the purchasing power of their financial assets. Another result of this disparity was boom conditions in the retail trade sector along the Texas side of the border. The Texas border region developed a thriving trade sector economy. Thus, the precipitous fall in the international purchasing power of the peso resulted in widespread business failure and unemployment. The collapse of the trade sector added to the relative poverty of the border region of Texas. This region has traditionally led the balance of the state in unemployment and lagged behind the state in income. There is very little industrial development in this region, and existing industry was unable to expand to alleviate the additional economic hardship that occurred in the aftermath of the peso devaluations.

Fishery development in progress: Impacts of the macroeconomy

Mexico in 1976 targeted several fisheries including tuna for expansion and development. This development was tied to a national economic plan dependent on future oil revenues as well as continued good political relations with the United States. Critics contend that the expansion was too ambitious and cite tons of unsold tuna as evidence. This critique is rejected on the grounds that exogenous events unrelated to the efficiency of the industry itself led to the excess supply of canned tuna in Mexico. This paper examines the impact on the development of the Mexican tuna industry of the Mexican fiscal crisis that occurred in 1982 and the tuna import embargo imposed by the U.S. in 1980. The results are that the peso devaluation and national recession had little real effect on the tuna industry. The embargo cost Mexico over $198 million in lost exports.

The impact of the 1982 Peso devaluations on crime in Texas Border Cities

The functional integrity of the U.S.-Mexico border region is jeopardized whenever the policies of either nation disrupt important transborder linkages. A case in point is the economic distress experienced in U.S. border cities following a series of drastic monetary changes initiated by the Mexican government in 1982. The peso devaluations, coupled with foreign exchange and trade controls, precipitated sharp drops in Mexican commercial demand, which in turn led to widespread business failures, spiraling unemployment, and expanding welfare rolls in border communities highly dependent on Mexican trade. While the well-documented economic shocks caused by the 1982 devaluations varied in magnitude by locale (Baerresen 1982, Diehl 1983, Hansen 1983, Shellhammer 1984, Ellard 1985, Harrell and Fischer 1985), their broader social impacts across border cities have not yet been examined. The effect of the devaluations on crime patterns is an especially relevant issue from both public-policy and social-scientific standpoints. The present study addresses the influence of economic disruption on crime within the four major Texas cities adjacent to the Mexican border -- Brownsville, McAllen, Laredo, and El Paso.

Devaluation and US tourism expenditure in Mexico

Studies that investigate the factors affecting US tourism expenditures in Mexico generally regard relative prices in these countries as sensitive determinants. The findings of inelasticity of expenditures of American tourists with respect to prices in the Mexican interior and border in several studies published in the 1980s are debatable. This study evaluates the impact of recent peso devaluations by adjusting 1970–1982 US tourism expenditures by an index that combines the Consumer Price Index in dollars, the CPI in pesos, and the exchange rate. The results here clearly indicate that US expenditures in the interior and on the border are price sensitive and have a strong positive trend reaction to devaluation in both nominal and real terms. Border expenditures clearly exceed interior expenditures and are more sensitive to exchange rate changes than expenditures in interior Mexico.

The response of labour effort to falling real wages: The Mexican peso devaluation of February 1982

This paper reports empirical evidence on the effect of the February 1982 Mexican peso devaluation with its concomitant reduction in real income on the output of individual workers. Using a set of pooled data for 46 workers employed in two textile plants in Mexicali over a 22-week period the regression results show a significant increase in average output of about 15% in response to the 25% decrease in wages due to the devaluation. The study also finds that there was no significant response in output to the legislated, annual increase in money wages of January 1982.

Why Mexico's ‘stabilizing development’ was actually destabilizing (with some implications for the future)

The recent devaluation of the Mexican peso, with all its accompanying disruptions, was a symptom of still unresolved structural problems. Apparent successes of the economy during the ‘stabilizing development’ of the 1960s caused the deferral of difficult solutions to underlying fiscal, financial and social problems. Echeverría's ‘shared development’ policies heightened the instability of the economy by avoiding tax reforms, postponing inevitable peso devaluation and failing to implement measures to reduce social inequalities. Given the eventual devaluations in 1976 and subsequent float of the peso, the new administration hopes to address more effectively fiscal and social disequilibria, but US cooperation will be required in the form of long-term credit to facilitate internal growth and employment, and in migration policy to permit a safety valve for Mexico's large and growing labour surplus.