A dynamic computable general equilibrium analysis of the stability of the Mexican financial system in the wake of liberal economic reforms

Economic shocks which change prices will affect the value of installed capital by altering the present value of expected dividends. If capital is imperfectly mobile across sectors, the effects of the shock on capital values will differ across sectors. Banking problems can result as falling asset values lower the value of collateral backing bank loans in declining sectors, while leaving bank liabilities (to depositors) intact.;Recent banking crises from Chile to Texas have followed terms of trade shocks which sharply changed relative prices, and evidence suggests that collapsing collateral values have been important factors for those banks which failed.;An analytical model reveals both short-term and long-term effects on the value of capital across sectors associated with terms of trade shock. The value of capital rises in the expanding sector and falls in the contracting sector, while which sector expands and which contracts depends entirely upon the elasticity of demand for the imported good. The farther this parameter is from one, the greater will be the structural adjustment and the capital gains and losses across sectors.;The body of the thesis is devoted to construction, estimation, and simulation of a dynamic computable general equilibrium model of the Mexican economy. Four shocks are simulated and analyzed: (1) An across the board increase in tariffs to 30%; (2) A 5% risk premium imposed on Mexican assets; (3) A 20% fall in world oil prices; (4) A 50% reduction in the profit tax rate.;The results suggest that assets in the mining and construction sectors are the most sensitive--the former for the important contribution of mining to exports, and the latter for importance of the construction sector in capital formation. As in the analytical model, import elasticities are extremely important in explaining structural adjustment and capital gains across sectors.;The impact of the various shocks is in general much greater in dollar than in peso terms, taking changes in exchange rates into consideration. This highlights the riskiness of contracting fixed liabilities denominated in dollars.