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The Interest Rate-Exchange Rate Link in the Mexican Float

  • Carlos A. Ibarra

    ()

    (Departamento de Economía, Universidad de las Américas Puebla)

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    This paper examines empirically the interest rate-exchange rate link in the context of the Mexican experience with a floating exchange regime. The impulse response function derived from an ECM estimated by GMM reveals a lasting positive effect of a currency depreciation on the peso-dollar interest rate differential. Some of the macroeconomic consequences from this pattern are discussed, together with a possible explanation based on the incorporation of the central bank reaction function into private expectations.

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    File URL: http://www.economiamexicana.cide.edu/num_anteriores/XIII-1/CARLOS_A_IBARRA.pdf
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    Article provided by in its journal Economia Mexicana NUEVA EPOCA.

    Volume (Year): XIII (2004)
    Issue (Month): 1 (January-June)
    Pages: 5-28

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    Handle: RePEc:emc:ecomex:v:13:y:2004:i:1:p:5-28
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    1. Bansal, Ravi & Dahlquist, Magnus, 1999. "The Forward Premium Puzzle: Different Tales from Developed and Emerging Economies," CEPR Discussion Papers 2169, C.E.P.R. Discussion Papers.
    2. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications 4205, Inter-American Development Bank, Research Department.
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    5. Clarida, Richard H, 2001. "The Empirics of Monetary Policy Rules in Open Economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 315-23, October.
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    7. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
    8. Maurice Obstfeld & Alan M. Taylor, 2002. "Globalization and Capital Markets," NBER Working Papers 8846, National Bureau of Economic Research, Inc.
    9. Bennett T. McCallum, 1992. "A Reconsideration of the Uncovered Interest Parity Relationship," NBER Working Papers 4113, National Bureau of Economic Research, Inc.
    10. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, May.
    11. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, vol. 33(1-2), pages 21-40, August.
    12. Eduardo Borensztein & Andrew Berg, 2000. "The Pros and Cons of Full Dollarization," IMF Working Papers 00/50, International Monetary Fund.
    13. Sebastian Edwards, 2001. "Exchange Rate Regimes, Capital Flows and Crisis Prevention," NBER Working Papers 8529, National Bureau of Economic Research, Inc.
    14. Shinji Takagi, 1991. "Exchange Rate Expectations: A Survey of Survey Studies," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 156-183, March.
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