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Convertibility risk, default risk, and the Mexdollar anomaly

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  • John H. Rogers

Abstract

Rogers (l992a,b) I put forth the convertibility risk hypothesis in order to explain the anomalous n~gative relationship between the expected rate of Mexican peso depreciation and the ratio of Mexdollars to peso denominated demand deposits. Recently, Gruben and Welch (1994) examine the effect of deteriorating bank loan quality on the variables I consider. Using a cointegration framework, the authors find (i) a negative relationship between non-performing loans and the dollarization ratio and (ii) the conventional positive relationship between expected peso depreciation and dollarization. The first result suggests an additional factor influencing money demand in Mexico. The second result is evidence against my convertibility risk hypothesis. Further analysis indicates that there is some evidence in favor of Gruben and Welch's first result, but that the preponderance of evidence runs counter to their second result.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1995/495/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1995/495/ifdp495.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 495.

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Date of creation: 1995
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Handle: RePEc:fip:fedgif:495

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Related research

Keywords: Foreign exchange - Law and legislation ; Mexico ; Devaluation of currency ; Peso; Mexican;

References

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  1. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
  2. Rogers, John H., 1992. "Convertibility risk and dollarization in Mexico: a vectorautoregressive analysis," Journal of International Money and Finance, Elsevier, vol. 11(2), pages 188-207, April.
  3. Rogers, J.H., 1990. "The Currency Substitution Hypothesis And Relative Money Demand In Mexico And Canada," Papers 7-90-1, Pennsylvania State - Department of Economics.
  4. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  5. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
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