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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)

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    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.

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    File URL: http://codex.colmex.mx:8991/exlibris/aleph/a18_1/apache_media/EXHELRP8X4TS7U343ID6SY6HREJNEX.pdf
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    Bibliographic Info

    Article provided by El Colegio de México, Centro de Estudios Económicos in its journal Estudios Económicos.

    Volume (Year): 21 (2006)
    Issue (Month): 1 ()
    Pages: 3-22

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    Handle: RePEc:emx:esteco:v:21:y:2006:i:1:p:3-22

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    Web page: http://www.colmex.mx/centros/cee/
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    2. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
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    14. Hegwood, Natalie D & Papell, David H, 1998. "Quasi Purchasing Power Parity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(4), pages 279-89, October.
    15. Atrayee Ghoshroy-Saha & Hendrik Vann De Berg, 1996. "Mexico's futile attempt to defy purchasing power parity," Applied Economics Letters, Taylor & Francis Journals, vol. 3(6), pages 395-399.
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    17. Antonio E. Noriega & Lorena Medina, 2003. "Quasi purchasing power parity: Structural change in the Mexican peso/us dollar real exchange rate," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 18(2), pages 227-236.
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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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