We argue that allowing for the possibility of a self-fulfilling panic helps understand several features of the recent Mexican Crisis. We present a simple model too explain how and why multiple equilibria can occur for some levels of reserves or debt, but not for others.

In this paper we closely exemine the financial events following the Mexican peso devaluation to uncover new lesons about the nature of financial crises.

We analyse the role of debt in persuading an entrepreneur to pay out cash flows, rather than to divert them. In the first part of the paper we study the optimal debt contract -- specifically, the trade-off between the size of the loan and the repayment -- under the assumption that some debt...