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Fundamentals of real exchange rate determination: What role in the peso crisis?

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  • Arne Kildegaard

    (university of Minnesota, Morris)

Abstract

We examine the role of structural factors in the Mexican real exchange rate experience since 1970, particularly in the crisis of December, 1994. We find that “fundamental" determinants of the real exchange--omitted from previous research--are cointegrated with nominal exchange rates and relative prices, while tests of PPP alone fail. The cointegrating equation indicates a severe undervaluation during the 1980s and only modest overvaluation in the period immediately preceding the devaluation in December, 1994. Nothing in the fundamentals can account for magnitude of the blow Mexico suffered at that time.

Suggested Citation

  • 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, vol. 21(1), pages 3-22.
    • Handle: RePEc:emx:esteco:v:21:y:2006:i:1:p:3-22
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    File URL: https://estudioseconomicos.colmex.mx/index.php/economicos/article/view/160/162
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    Cited by:

    1. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.

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