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

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Author Info
Antonia López Villavicencio () (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
Josep Lluís Raymond Bara (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)

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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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Publisher 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.;

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other

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    Other versions:
  2. Joseph Joyce & Linda Kamas, 2003. "Real and nominal determinants of real exchange rates in Latin America: Short-run dynamics and long-run equilibrium," The Journal of Development Studies, Taylor and Francis Journals, vol. 39(6), pages 155-182, January. [Downloadable!] (restricted)
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  7. Pesaran,H.M. & Shin,Y., 1995. "Long-Run Structural Modelling," Cambridge Working Papers in Economics 9419, Faculty of Economics, University of Cambridge.
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  8. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
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  11. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
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