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Capital Flows and Real Exchange Rate Appreciation in Mexico

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  • Ibarra, Carlos A.
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    Abstract

    Following the recently-developed bounds testing approach, the paper analyzes the long-run determinants of the Mexican peso’s real exchange rate from 1988Q1 to 2008Q2. Controlling for the standard determinants, the paper shows that all types of capital inflows tended to appreciate the peso. In contrast to recent multi-country studies, it finds no evidence of a less harmful effect from foreign direct investment (FDI)—on the contrary, the FDI’s appreciation effect can be particularly strong—and interprets this finding. The paper also shows that monetary policy, through changes in the short-term interest differential, can have persistent, level effects on the real exchange rate.

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    Bibliographic Info

    Article provided by Elsevier in its journal World Development.

    Volume (Year): 39 (2011)
    Issue (Month): 12 ()
    Pages: 2080-2090

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    Handle: RePEc:eee:wdevel:v:39:y:2011:i:12:p:2080-2090

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    Web page: http://www.elsevier.com/locate/worlddev

    Related research

    Keywords: capital flows; FDI; real exchange rate; ARDL bounds testing approach; Latin America; Mexico;

    References

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    1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "The Capital Inflows Problem: Concepts And Issues," Contemporary Economic Policy, Western Economic Association International, vol. 12(3), pages 54-66, 07.
    2. Blecker, Robert A., 2009. "External Shocks, Structural Change, and Economic Growth in Mexico, 1979-2007," World Development, Elsevier, Elsevier, vol. 37(7), pages 1274-1284, July.
    3. Selim Elekdag & M. Ayhan Kose & Roberto Cardarelli, 2009. "Capital Inflows," IMF Working Papers 09/40, International Monetary Fund.
    4. Kose, Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2009. "Financial Globalization and Economic Policies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7117, C.E.P.R. Discussion Papers.
    5. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals," IMF Working Papers 98/67, International Monetary Fund.
    6. Prema-Chandra Athukorala & Sarath Rajapatirana, 2003. "Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America," The World Economy, Wiley Blackwell, vol. 26(4), pages 613-637, 04.
    7. Peter Blair Henry, 2006. "Capital account liberalization: theory, evidence, and speculation," Working Paper Series 2007-32, Federal Reserve Bank of San Francisco.
    8. Luis Miguel Galindo & Jaime Ros, 2008. "Alternatives to inflation targeting in Mexico," International Review of Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 22(2), pages 201-214.
    9. Aizenman, Joshua & Riera-Crichton, Daniel, 2007. "Real exchange rate and international reserves in an era of growing financial and trade integration," Santa Cruz Department of Economics, Working Paper Series qt6dr794sb, Department of Economics, UC Santa Cruz.
    10. Joseph Joyce & Linda Kamas, 2003. "Real and nominal determinants of real exchange rates in Latin America: Short-run dynamics and long-run equilibrium," Journal of Development Studies, Taylor & Francis Journals, vol. 39(6), pages 155-182.
    11. Bassem Kamar & Damyana Bakardzhieva & Samy Ben Naceur & Sami Ben Naceur, 2010. "The Impact of Capital and Foreign Exchange Flowson the Competitiveness of Developing Countries," IMF Working Papers 10/154, International Monetary Fund.
    12. Miguel D. Ramirez, 2002. "Foreign Direct Investment in Mexico during the 1990s: An Empirical Assessment," Eastern Economic Journal, Eastern Economic Association, vol. 28(3), pages 409-423, Summer.
    13. Corbo, Vittorio & Hernandez, Leonardo, 1996. "Macroeconomic Adjustment to Capital Inflows: Lessons from Recent Latin American and East Asian Experience," World Bank Research Observer, World Bank Group, World Bank Group, vol. 11(1), pages 61-85, February.
    14. Emmanuel K. K. Lartey, 2007. "Capital inflows and the real exchange rate: An empirical study of sub-Saharan Africa," The Journal of International Trade & Economic Development, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(3), pages 337-357.
    15. Paresh Kumar Narayan, 2005. "The saving and investment nexus for China: evidence from cointegration tests," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(17), pages 1979-1990.
    16. Fernandez-Arias, Eduardo & Montiel, Peter J., 1995. "The surge in capital inflows to developing countries : prospects and policy response," Policy Research Working Paper Series 1473, The World Bank.
    17. Carlos Ibarra, 2011. "Monetary Policy and Real Currency Appreciation: A BEER Model for the Mexican Peso," International Economic Journal, Taylor & Francis Journals, Taylor & Francis Journals, vol. 25(1), pages 91-110.
    18. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers, Stanford Institute for Economic Policy Research 07-004, Stanford Institute for Economic Policy Research.
    19. Cardarelli, Roberto & Elekdag, Selim & Kose, M. Ayhan, 2010. "Capital inflows: Macroeconomic implications and policy responses," Economic Systems, Elsevier, vol. 34(4), pages 333-356, December.
    20. Sebastian Edwards & Miguel A. Savastano, 1999. "Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?," NBER Working Papers 7228, National Bureau of Economic Research, Inc.
    21. Arne Kildegaard, 2006. "Fundamentals of real exchange rate determination: What role in the peso crisis?," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 21(1), pages 3-22.
    22. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
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    Cited by:
    1. Konstantins Benkovskis & Julia Wörz, 2012. "Non-Price Competitiveness of Exports from Emerging Countries," FIW Working Paper series, FIW 100, FIW.
    2. Thomas Goda & Alejandro Torres, 2013. "Overvaluation of the real exchange rate and the Dutch Disease: the Colombian case," DOCUMENTOS DE TRABAJO CIEF, UNIVERSIDAD EAFIT 010930, UNIVERSIDAD EAFIT.

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