The restructuring and fragility of the Mexican financial system
Hypothesis. The 1994–95 Mexican financial crisis was a result of structural problems like financial fragility, solvency, financial disintermediation, liquidity, financial excesses, and generation and allocation of savings; the dynamics of this crisis evolved, specifically, in what Taylor (1998) has called a “Frenkel-Neftci” cycle, where the government laxity to liberalize the economy, and particularly the financial system, provoked strong motivations for threatening private sector financial performance, on the part of both internal and foreign players. Feedbacks of their actions to the macroeconomic stage disturb the system. Before the 1994–95 economic crisis, the financial institutions faced a dual financial problem: a weak financial linkage, which is reflected in financial disintermediation, and on the other hand, a high forward and backward linkage, which meant a higher financial fragility as a result of the liberalization reforms. Thus, the structural financial problems can be diagnosed as a real potential risk of generalized economic crisis nowadays.
Method. The financial fragility analysis is conducted by the last developments in the Minskian financial fragility theory elaborated by Taylor and O'Connell (1989), Foley (2001), and the empirical application of Schroeder (2002). Such analyses provide, theoretically and methodologically, a better understanding of the structural financial conditions that led developing countries like Mexico toward generalized economic crises in the process of economic liberalization. However, there are some dimensions of fragility that are considered with a SAM framework and some standard data; whereby, we sketch the dynamics of the crisis a la Taylor, and the evolution of the financial institutions during the liberalization experience.
Additionally, the SAM framework is used to estimate an additive decomposition of accounting multipliers that permits to identify the path an initial cash flows injection follows through the complex economic structure. The inter-institutional linkage analysis provides indices from the different multiplier matrices that proof the existence and magnitude of the dual financial problem.
Conclusions. The Mexican financial crisis of 1994–95 was a result of structural problems like financial fragility, solvency, financial disintermediation, liquidity, financial excesses, and generation and allocation of savings; the dynamics of such a crisis evolved, specifically, in a “Frenkel-Neftci” cycle. Furthermore, the dual financial problem was reflected in financial disintermediation and financial fragility. Thus, structural financial problems can be diagnosed as a real potential risk of generalized economic crisis nowadays.
0511: Economic theory