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

  • Arne Kildegaard

    (university of Minnesota, Morris)

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    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://codex.colmex.mx:8991/exlibris/aleph/a18_1/apache_media/EXHELRP8X4TS7U343ID6SY6HREJNEX.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
    Contact details of provider: Web page: http://www.colmex.mx/centros/cee/

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