Lessons from Mexico: The Role of Financial Institutions in Market Crises

Abstract

The financial sector promotes a nation’s economic growth and performance. By facilitating the transfer of funds from surplus income units to deficit spending units, financial intermediaries foster expansion of the economic system. But do financial markets and institutions merely facilitate the real forces driving development or do they play a more prominent, causative role in the growth process? A review of Mexico’s debt crisis in 1982 and the financial crisis of 1994/1995 offers valuable insights into how financial sector conditions, especially in the banking industry, can influence economic performance.