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

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Author Info
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.

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File URL: http://revistas.colmex.mx/revistas/12/art_12_1124_8531.pdf
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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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  1. 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. [Downloadable!]
  2. Johansen, Soren, 1992. "Testing weak exogeneity and the order of cointegration in UK money demand data," Journal of Policy Modeling, Elsevier, vol. 14(3), pages 313-334, June. [Downloadable!] (restricted)
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  3. Joachim Zietz, 2000. "Cointegration versus traditional econometric techniques in applied economics," Eastern Economic Journal, Eastern Economic Association, vol. 26(4), pages 469-482, Fall. [Downloadable!]
  4. Kenneth A. Froot & Kenneth Rogoff, 1996. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Dickey, David A & Pantula, Sastry G, 1987. "Determining the Ordering of Differencing in Autoregressive Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 455-61, October.
  6. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. Ghoshroy-Saha, Atrayee & van den Berg, Hendrik, 1996. "Mexico's Futile Attempt to Defy Purchasing Power Parity," Applied Economics Letters, Taylor and Francis Journals, vol. 3(6), pages 395-99, June. [Downloadable!] (restricted)
  9. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November. [Downloadable!] (restricted)
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  10. Selahattin Dibooglu, 1995. "Real Disturbances, Relative Prices, and Purchasing Power Parity," International Finance 9502002, EconWPA. [Downloadable!]
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  11. Leybourne, S J, 1995. "Testing for Unit Roots Using Forward and Reverse Dickey-Fuller Regressions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(4), pages 559-71, November.
  12. Cheung, Yin-Wong & Lai, Kon S., 1993. "Long-run purchasing power parity during the recent float," Journal of International Economics, Elsevier, vol. 34(1-2), pages 181-192, February. [Downloadable!] (restricted)
  13. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July. [Downloadable!] (restricted)
  14. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 461-70, October.
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