Macroeconomic Effects of Capital Flows: The Case of Mexico

Abstract

Mexico has been paradigmatic of the trends that international capital flows to developing countries have followed during the last 25 years. Most of the 1980s were defined by a situation of minimal access to foreign resources and significant ‘flight’ of domestic capital, as a consequence of the 1982 debt crisis. Later, during the boom of the early 1990s, the country became a major destination for foreign capital. This was a period when portfolio investment in particular, rather than bank loans as had been previously the case, became the major source of non-FDI flows. Finally, the domestic financial crisis of 1995, triggered by the peso devaluation of December 1994, gave way to yet another phase in the evolution of capital flows. While FDI has surged, other types of flows have been comparatively small, though they have shown great volatility, leading to quarterly levels which in absolute terms could be as high as those associated with FDI.