Short-run and long-run determinants of the real exchange rate in Mexico

Antonia López Villavicencio, Josep Lluís Raymond Bara

Research output: Contribution to journalArticleResearchpeer-review

7 Citations (Scopus)

Abstract

This paper explores the real exchange rate behavior in Mexico from 1960 until 2005. Since the empirical analysis reveals that the real exchange rate is not mean reverting, we propose that economic fundamental variables affect its evolution in the long run. Therefore, based on equilibrium exchange rate paradigms, we propose a simple model of real exchange rate determination, which includes the relative GDP per capita, the real interest rates, and the net foreign assets over a long period of time. Our analysis also considers the dynamic adjustment in response to shocks through impulse response functions derived from the multivariate vector autoregressive (VAR) model. © Journal compilation © 2008 Institute of Developing Economies.
Original languageEnglish
Pages (from-to)52-74
JournalDeveloping Economies
Volume46
DOIs
Publication statusPublished - 1 Mar 2008

Keywords

  • Balassa-Samuelson effect
  • Bounds cointegration test
  • Error correction model
  • Purchasing power parity
  • Real exchange rate

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