Effect of Mexican Crisis on Mexican Interest Rates

Note: Interest rates are annualized rates for bonds with three month maturity.

Data

After the foreign exchange crisis of mid-December, 1994, Mexican interest rates shot upwards. The difference between the U.S. treasury bill rate and the rate on Mexican dollar denominated bonds indicates the additional cost of Mexican default risk. By the fourth week of January, 1995, this risk premium amounted to 13 percentage points. The difference between the rates on Mexican dollar-denominated debt and Mexican peso-denominated debt indicates the cost of expected peso depreciation. By the fourth week of January this difference amounted to 6 percentage points. Thus after the currency crisis, shifts in world interest rates were dwarfed by risk premiums demanded for Mexican bonds.

Mexican Economic Crisis