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The short and long-run determinants of the real exchange rate in Mexico

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  • Antonia López Villavicencio

    ()
    (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)

  • Josep Lluís Raymond Bara

    ()
    (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)

Abstract

This paper explores the real exchange rate behavior in Mexico from 1960 until 2005. Since the empirical analysis reveals that the real exchange rate is not mean reverting, we propose that economic fundamental variables affect its evolution in the long-run. Therefore, based on equilibrium exchange rate paradigms, we propose a simple model of real exchange rate determination which includes the relative labor productivity, the real interest rates and the net foreign assets over a long period of time. Our analysis also considers the dynamic adjustment in response to shocks through impulse response functions derived from the multivariate VAR model.

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Bibliographic Info

Paper provided by Department of Applied Economics at Universitat Autonoma of Barcelona in its series Working Papers with number wpdea0606.

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Length: 29 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:uab:wprdea:wpdea0606

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Related research

Keywords: real exchange rate; purchasing power parity; Balassa-Samuelson effect; error correction models; bounds cointegration test.;

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  1. Kamin, Steve B. & Rogers, John H., 2000. "Output and the real exchange rate in developing countries: an application to Mexico," Journal of Development Economics, Elsevier, vol. 61(1), pages 85-109, February.
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