Real Exchange Rate Response to Capital Flows in Mexico: An Empirical Analysis

June 1, 2000

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Format: Chicago

Marcelo P. Dabós, and V. Hugo Juan-Ramon Real Exchange Rate Response to Capital Flows in Mexico: An Empirical Analysis, (USA: International Monetary Fund, 2000) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This study shows that in Mexico there is a long-run relationship between the real exchange rate and capital inflows, the external terms of trade, and productivity in the manufacturing sector. A once-and-for-all unit increase in the ratio of quarterly capital inflow to quarterly (annualized) GDP causes a long-run real appreciation of the peso of about 12 percent. The analysis also reveals a structural break in 1995, which coincides with the change to a floating exchange rate arrangement, and an overvaluation of the peso in real terms on the eve of the end–1994 crisis in the range of 12 to 25 percent.

Subject: Balance of payments, Capital flows, Capital inflows, Foreign exchange, International trade, National accounts, Real exchange rates, Real exports, Terms of trade

Keywords: Capital flows, Capital inflow, Capital inflows, Coefficient of the equilibrium correction term, EqCM estimation, Equilibrium-correction model, Exchange rate liberalization, Exchange rate response, Explanatory variables, Export real exchange rate, External terms of trade, Income effect, Natural logarithm, Nominal exchange rate, Productivity, Productivity index, Real exchange rates, Real exports, Regression estimate, Response to capital, Terms of trade, Terms of trade index, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2000/108
Stock No:

WPIEA1082000
ISBN:

9781451853094
ISSN:

1018-5941

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