This paper draws several important lessons from the Tequila Crisis of 1994 and 1995. The overriding lesson is that the dynamics of financial crises in emerging market countries differ from those in industrialized countries because institutional features of their debt markets differ. Several policy lessons for emerging market countries also emerge from the analysis: (1) pegged exchange-rate regimes are extremely dangerous, (2) strong prudential supervision of the banking system is critical for prevention of financial crises, (3) financial liberalization must be managed extremely carefully and (4) different policies are needed to promote recovery in emerging market countries than those that are applicable to industrialized countries.

A heated debate has arisen over the policy ineffectiveness proposition associate with the work of Lucas, Sargent, and Wallace. It postulates that anticipated aggregate demand policy will have no effect on business-cycle fluctuations, so that one deterministic, feedback policy rule is as good as any other from the point of view of stabilizing the economy. This paper develops a methodology for empirically analyzing rational-expectations models displaying this neutrality result and then applies it to the important question of whether anticipated monetary policy matters to the business cycle.

We investigate the stochastic relation between income and consumption (specifically, consumption of food) within a panel of about 2,000 households. Our major findings are: 1. Consumption responds much more strongly to permanent than to transitory movements of income. 2. The response to transitory income is nonetheless clearly positive. 3. A simple test, independent of our model of consumption, rejects a central implication of the pure life cycle-permanent income hypothesis. The observed covariation of income and consumption is compatible with pure life cycle-permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent. As a general matter, our findings support the view that families respond differently to different sources of income variations. In particular, temporary income tax policies have smaller effects on consumption than do other, more permanent changes in income of the same magnitude.