began purchasing increasingly more imports, and Mexico began running a large trade deficit. Speculators began recognizing that the peso was artificially overvalued and led to speculative capital flight that further reinforced downward market pressure on the peso. Mexico's central bank deviated from standard central banking policy when it fixed the peso to the dollar in 1988. Instead of allowing its monetary base to contract and its interest rates to rise, the central bank purchased treasury bills to prop up its monetary base and prevent rising interest rates—especially given that 1994 was an election year. Additionally, servicing the tesobonos with U.S. dollar repayments further drew down the central bank's foreign exchange reserves. Consistent with the macroeconomic trilemma in which a country with a fixed exchange rate and free flow of financial capital sacrifices monetary policy autonomy, the central bank's interventions to revalue the peso caused Mexico's money supply to contract (without an exchange rate peg, the currency would have been allowed to depreciate). The central bank's foreign exchange reserves began to dwindle and it completely ran out of U.S. dollars in December 1994. Crisis On December 20, 1994, newly inaugurated President Ernesto Zedillo announced the Mexican central bank's devaluation of the peso between 13% and 15%. Devaluing the peso after previous promises not to do so led investors to be skeptical of policymakers and fearful of additional devaluations. Investors flocked to foreign investments and placed even higher risk premia on domestic assets. This increase in risk premia placed additional upward market pressure on Mexican interest rates as well as downward market pressure on the Mexican peso. Foreign investors anticipating further currency devaluations began rapidly withdrawing capital from Mexican investments and selling off shares of stock as the Mexican Stock Exchange plummeted. To discourage such capital flight, particularly from debt instruments, the Mexican central bank raised interest rates, but higher borrowing costs ultimately hindered economic growth prospects. When the time came for Mexico to roll over its maturing debt obligations, few investors were interested in purchasing new debt. To repay tesobonos, the central bank had little choice but to purchase dollars with its severely weakened pesos, which proved extremely expensive. The Mexican government faced an imminent sovereign default. On December 22, the Mexican government allowed the peso to float, after which the peso depreciated another 15%. The value of the Mexican peso depreciated roughly 50% from 3.4 MXN/USD to 7.2, recovering only