Real Exchange Rate Response to Capital Flows in Mexico: An Empirical Analysis

This study shows that in Mexico there is a long-run relationship between the real exchange rate and capital inflows, the external terms of trade, and productivity in the manufacturing sector. A once-and-for-all unit increase in the ratio of quarterly capital inflow to quarterly (annualized) GDP causes a long-run real appreciation of the peso of about 12 percent. The analysis also reveals a structural break in 1995, which coincides with the change to a floating exchange rate arrangement, and an overvaluation of the peso in real terms on the eve of the end-1994 crisis in the range of 12 to 25 percent.
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Volume/Issue: Volume 2000 Issue 108
Publication date: June 2000
ISBN: 9781451853094
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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Business and Economics , Exports and Imports , WP , nominal exchange rate , Export real exchange rate , capital inflow , terms of trade , productivity , equilibrium-correction model , exchange rate response , explanatory variables , natural logarithm , productivity index , EqCM estimation , response to capital , exchange rate liberalization , coefficient of the equilibrium correction term , regression estimate , terms of trade index , income effect , external terms of trade , Real exchange rates , Capital inflows , Capital flows , Real exports

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Summary

This study shows that in Mexico there is a long-run relationship between the real exchange rate and capital inflows, the external terms of trade, and productivity in the manufacturing sector. A once-and-for-all unit increase in the ratio of quarterly capital inflow to quarterly (annualized) GDP causes a long-run real appreciation of the peso of about 12 percent. The analysis also reveals a structural break in 1995, which coincides with the change to a floating exchange rate arrangement, and an overvaluation of the peso in real terms on the eve of the end–1994 crisis in the range of 12 to 25 percent.

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