The 1994 Peso Crisis: Overvaluation or Overreaction
Siepman, Cole
Siepman, Cole
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2025-05-19
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Abstract
The understanding of financial market crashes evolves over time. First Economists were confident that the 2008 Global Financial Crisis was caused purely by a housing bubble, then it became clearer that systemic problems in the US financial system caused a much bigger crisis than a housing bubble would justify. With financial crises in smaller economies, often this evolution of understanding takes more time -- if it is ever reached. And this paper will shed light on whether the prevailing opinions on the 1994 Mexican Peso Crisis are accurate. Here the opinions of peso overvaluation during this period will be challenged, and by using economic theory of what underlying factors determine the price of a currency, I will create a prediction of the peso price between 1991 and 1999 as its underlying determinates would reflect. This prediction then will be compared to the actual price of the peso and from there the gap between the predicted and actual price will determine what overvaluation or undervaluation occurred and to what extent. The results show that although the overvaluation before the crisis, as predicted by economists, was present, it was much overstated and concludes that this overvaluation wasn't a justifiable cause of the crisis or a significant explanation to why the Mexican Economy was destined for financial collapse.