Second Quarter 1995
Federal Reserve Bank of Dallas

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Mexico's Crisis: Looking Back to Assess the Future
David M. Gould

Mexico's most recent economic crisis took many in the international business community by surprise. In early December 1994, the Blue Chip consensus forecast for 1995 Mexican real GDP growth was 3.8 percent. A few weeks later, on December 20, the devaluation of the Mexican peso rocked international financial markets. What first appeared to be a minor correction in Mexico's nominal exchange rate quickly developed into a broader financial crunch felt in and outside Mexico. The Mexican government now expects the country's real GDP to fall about 3 percent in 1995; some private economists suggest an even greater decline.

What caused Mexico's recent economic crisis, and how long will it take Mexico to recover? Were Mexico's economic reforms reality or illusion?

In this article, David M. Gould argues that to assess Mexico's future, one must look at Mexico's past. Gould finds that, unlike the period prior to Mexico's 1982 debt crisis, the recent trend in Mexico's economic policies has been toward greater economic integration in the world economy and less reliance on the government. Although Mexico may need several years to regain the investor confidence it lost during the recent economic crisis, the trend in Mexico's policies is more consistent with future low inflation and higher growth than the country's previous closed-market policies.

Energy Prices and State Economic Performance
Stephen P. A. Brown and Mine K. Yucel

Changes in energy prices have had sizable but differing effects on economic activity across the United States. The composition of each state's economy largely determines how its employment responds to changes in energy prices. In this article, Stephen Brown and Mine Yucel use simulations based on input-output analysis to assess the long-term consequences of changing oil prices on employment in each state in 1982, 1992, and 2000. Brown and Yucel find that because state economies are becoming more similar in their composition, the variation across states in the response to changing oil prices is narrowing. The authors' findings suggest that the grounds for regional divisions in the debate over national energy policy have lessened since the early 1980s and will continue to do so throughout the remainder of the 1990s.

Optimal Monetary Policy in an Economy with Sticky Nominal Wages
Evan F. Koenig

In this article, Evan Koenig derives the optimal monetary policy rule for an economy with contractual wage agreements. The optimal rule has the monetary authority target a weighted average of aggregate output and the price level. In a realistic special case, the optimal rule calls for the monetary authority to target aggregate nominal spending. The optimal rule is quite general in form, encompassing policy proposals made by such prominent economists as Robert Hall and John Taylor.

Koenig points out that if the monetary authority responds optimally to economic shocks, it will be difficult to distinguish the effects of monetary policy from the effects of the shocks themselves. So, the important contribution that monetary policy makes to the economy may easily be overlooked. Paradoxically, only insofar as monetary policy is implemented with error will it be apparent that monetary policy matters.