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Monetary Policy and Real Currency Appreciation: A BEER Model for the Mexican Peso

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  • Carlos Ibarra

Abstract

A notable feature of the Mexican economy since the late 1980s was the persistent real appreciation of the peso. The appreciation - a key development that helps to explain Mexico's slow rate of economic growth - took place despite changes in the exchange-rate regime, yet with an unchanging focus of monetary policy on gradually reducing the inflation rate. Thus, the frequent assumption that only real-side variables (as opposed to monetary ones) have a lasting or 'long-run' effect on the real exchange may not suit the recent Mexican case. The paper presents the results of an econometric study of exchange rate determination in Mexico for the period 1990Q1-2006Q4. The study is based on the so-called BEER (Behavioral Equilibrium Exchange Rate) model, which relies on Johansen's cointegration methodology and jointly considers real-side and monetary determinants. The estimation results - in the form of two- and three-equation cointegration models - show that, controlling for the influence of real-side determinants, the peso-dollar interest differential had a statistically and economically significant long-run effect on the peso's real exchange rate.

Suggested Citation

  • Carlos Ibarra, 2011. "Monetary Policy and Real Currency Appreciation: A BEER Model for the Mexican Peso," International Economic Journal, Taylor & Francis Journals, vol. 25(1), pages 91-110.
  • Handle: RePEc:taf:intecj:v:25:y:2011:i:1:p:91-110
    DOI: 10.1080/10168737.2010.487539
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    References listed on IDEAS

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    1. Dani Rodrik, 2008. "The Real Exchange Rate and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 365-439.
    2. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17.
    3. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    4. Jeffrey Frankel, 2007. "On The Rand: Determinants Of The South African Exchange Rate," South African Journal of Economics, Economic Society of South Africa, vol. 75(3), pages 425-441, September.
    5. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals; A Methodological Comparison of BEERs and FEERs," IMF Working Papers 98/67, International Monetary Fund.
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    Cited by:

    1. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.
    2. Ibarra, Carlos A., 2011. "Import elasticities and the external constraint in Mexico," Economic Systems, Elsevier, vol. 35(3), pages 363-377, September.

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