Applied International Macroeconomics

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The problems in the paragraph below including incorrect figures (peso depreciation in 1982); a mistaken focus on peak inflation rather than the average extra inflation over a period of years; excessive precision (too many significant digits); inconsistent precision (sometimes 2 decimal points, sometimes none); words that aren’t words (“devaluate” should be “devalue”), missing participles (“the”); and other grammatical mistakes.

Over this period (1954-2009), there were two major crises that were the results of fixed exchange rate and high inflation rate, during which Bank of Mexico was forced to devaluate the peso. In 1975-1976 domestic inflation rate soared to 16%. With the US inflation of only 6%, the competitiveness of Mexican goods worsened dramatically. To maintain the value of the peso, Bank of Mexico had to buy peso with its foreign exchange reserve and in the end, when the foreign exchange reserve was drained, the monetary authority had to give up the fixed exchange rate regime and devaluate its currency from 0.0125 per dollar to 0.0200 per dollar. The same situation took place in the end of 1981 and 1982, when domestic inflation reached 58.92% and Bank of Mexico had to devaluate peso from 0.0965 to 0.1239 per dollar.

Here is an alternative version that uses 25% fewer words to say the same thing (note that the incorrect magnitude of the 1982 depreciation has been corrected – see underlined text):

Between 1954 and 2009 Mexico twice suffered exchange rate crises that stemmed from high inflation combined with a fixed exchange rate. In 1976 Mexican inflation peaked at 16% while US inflation was only 6%, so Mexican competitiveness and net exports were declining dramatically. The Bank of Mexico intervened to support the peso but when its foreign exchange reserves were drained it devalued the peso from 0.125 to 0.020 pesos per USD. A similar crisis occurred in 1982, when Mexican inflation peaked at 59% and the peso was devalued by 270%.

Here is an alternative version that uses the same original number of words to say much more. Note that this version uses specific numbers more appropriately. For example, it highlights average inflation over periods of a few years rather than peak inflation (see italics). This version is also more correct in describing the causes of the second crisis (see underlined text).

Between 1954 and 2009 Mexico twice suffered exchange rate crises that stemmed, at least in part, from the poisonous combination of high inflation and a fixed exchange rate. The first occurred in 1976, after Mexican inflation had averaged over 20% for four years while US inflation had averaged only about 5%. Mexican competitiveness of declined dramatically and net exports tumbled to -4% of GDP. The Bank of Mexico intervened to support the peso but when its foreign exchange reserves were finally depleted it devalued the peso by 60%. After five more years of inflation in excess of 20% the peso was again devalued in 1982, this time by a massive 270%. Competitiveness improved far more dramatically in 1982 than in 1976 because this second crisis was triggered not only by declining net exports but also by Mexico’s excessive international indebtedness.