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Great Appreciations: Accounting for the Real Exchange Rate in Mexico, 1988-2002

  • Felipe Meza

    ()

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

  • Carlos Urrutia

    ()

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

Between 1988 and 2002, the real exchange rate in Mexico appreciated by 45%. We account for this movement in relative prices using a two sector, dynamic general equilibrium model of a small open economy with tradable an non-tradable goods. The model allows us to identify the effect of the differential in productivity growth across sectors (the Balassa-Samuelson effect) from other types of shocks affecting the allocation of resources (terms of trade, migration remittances and international reserves accumulation). We find that productivity growth in the tradable sector and a decline in the real interest rate faced by Mexico in the international markets account for 70% of the real exchange rate appreciation. Our model is also consistent with the reallocation of capital and labor from tradable to non-tradable sectors. None of our results support a significant role for terms of trade, migration remittances or international reserves accumulation.

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Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 0807.

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Length: 34 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:cie:wpaper:0807
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  1. Charles Engel, 1995. "Accounting for U.S. Real Exchange Rate Changes," NBER Working Papers 5394, National Bureau of Economic Research, Inc.
  2. Betts, Caroline M. & Kehoe, Timothy J., 2006. "U.S. real exchange rate fluctuations and relative price fluctuations," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1297-1326, October.
  3. Daron Acemoglu & Veronica Guerrieri, 2008. "Capital Deepening and Nonbalanced Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 116(3), pages 467-498, 06.
  4. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  5. Timothy J. Kehoe & Kim J. Ruhl, 2008. "Sudden stops, sectoral reallocations, and the real exchange rate," Staff Report 414, Federal Reserve Bank of Minneapolis.
  6. Vivian Z. Yue & Enrique G. Mendoza, 2009. "A Solution to the Default Risk-Business Cycle Disconnect," 2009 Meeting Papers 76, Society for Economic Dynamics.
  7. Ngai, Liwa Rachel & Pissarides, Christopher, 2004. "Structural Change in a Multi-Sector Model of Growth," CEPR Discussion Papers 4763, C.E.P.R. Discussion Papers.
  8. Meza Felipe & Quintin Erwan, 2007. "Factor Utilization and the Real Impact of Financial Crises," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-41, September.
  9. Elias Brandt & Scott Dressler & Erwan Quintin, 2004. "The real impact of financial crises," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, pages 1-15.
  10. Sangeeta Pratap & Carlos Urrutia, 2011. "Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises," Working Papers 1104, Centro de Investigacion Economica, ITAM.
  11. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  12. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad, 1999. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries," Journal of International Economics, Elsevier, vol. 47(2), pages 245-266, April.
  13. Timothy J. Kehoe & Kim J. Ruhl, 2007. "Are shocks to the terms of trade shocks to productivity?," Staff Report 391, Federal Reserve Bank of Minneapolis.
  14. Asea, Patrick K & Mendoza, Enrique G, 1994. "The Balassa-Samuelson Model: A General-Equilibrium Appraisal," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 244-67, October.
  15. Felipe Meza, 2008. "Financial Crisis, Fiscal Policy, and the 1995 GDP Contraction in Mexico," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1239-1261, 09.
  16. repec:cup:cbooks:9780521068710 is not listed on IDEAS
  17. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "Decades lost and found: Mexico and Chile since 1980," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-30.
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