ABSTRACT
The high domestic real interest rates that are a consequence of the external debt problem are an important obstacle to investment and sound public finances. The ratio between oil prices and real interest rates decreased from 30:1 in the late 1970s to just 3:1 currently. Mexico has borne the full burden of adjustment to this change. Fiscal and monetary policies in the United States (US) are crucial for improving external macroeconomic conditions for Mexico. A reduction in the US primary fiscal deficit in proportion to GDP of even one-quarter the magnitude of the one actually undertaken by Mexico would go a long way toward resolving Mexico’s problem of excessively high foreign real interest rates. Some causes important financing problems for Mexico, the first because of extremely high domestic real interest rates and the second because of the negative impact on foreign reserves.
