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The Interest Rate-Exchange Rate Link in the Mexican Float

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  • Carlos A. Ibarra

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    (Departamento de Economía, Universidad de las Américas Puebla)

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    Abstract

    This paper examines empirically the interest rate-exchange rate link in the context of the Mexican experience with a floating exchange regime. The impulse response function derived from an ECM estimated by GMM reveals a lasting positive effect of a currency depreciation on the peso-dollar interest rate differential. Some of the macroeconomic consequences from this pattern are discussed, together with a possible explanation based on the incorporation of the central bank reaction function into private expectations.

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    File URL: http://www.economiamexicana.cide.edu/num_anteriores/XIII-1/CARLOS_A_IBARRA.pdf
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    Bibliographic Info

    Article provided by in its journal Economia Mexicana NUEVA EPOCA.

    Volume (Year): XIII (2004)
    Issue (Month): 1 (January-June)
    Pages: 5-28

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    Handle: RePEc:emc:ecomex:v:13:y:2004:i:1:p:5-28

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    Keywords: interest rate-exchange rate link; floating exchange rate regimes;

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    1. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
    2. Giuseppe Bertola & Lars E.O. Svensson, 1991. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," NBER Working Papers 3576, National Bureau of Economic Research, Inc.
    3. Vittorio Corbo, 2000. "Monetary Policy in Latin America in the 90s," Working Papers Central Bank of Chile, Central Bank of Chile 78, Central Bank of Chile.
    4. Clarida, Richard H, 2001. "The Empirics of Monetary Policy Rules in Open Economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 6(4), pages 315-23, October.
    5. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, Elsevier, vol. 33(1-2), pages 21-40, August.
    6. Shinji Takagi, 1991. "Exchange Rate Expectations: A Survey of Survey Studies," IMF Staff Papers, Palgrave Macmillan, Palgrave Macmillan, vol. 38(1), pages 156-183, March.
    7. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications, Inter-American Development Bank, Research Department 4205, Inter-American Development Bank, Research Department.
    8. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195060119, October.
    9. Bansal, Ravi & Dahlquist, Magnus, 2000. "The forward premium puzzle: different tales from developed and emerging economies," Journal of International Economics, Elsevier, Elsevier, vol. 51(1), pages 115-144, June.
    10. Maurice Obstfeld & Alan M. Taylor, 2002. "Globalization and Capital Markets," NBER Working Papers 8846, National Bureau of Economic Research, Inc.
    11. McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(1), pages 105-132, February.
    12. Eduardo Borensztein & Andrew Berg, 2000. "The Pros and Cons of Full Dollarization," IMF Working Papers, International Monetary Fund 00/50, International Monetary Fund.
    13. Sebastian Edwards, 2001. "Exchange Rate Regimes, Capital Flows and Crisis Prevention," NBER Working Papers 8529, National Bureau of Economic Research, Inc.
    14. Nakagawa, Hironobu, 2002. "Real exchange rates and real interest differentials: implications of nonlinear adjustment in real exchange rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(3), pages 629-649, April.
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