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

33 Pages Posted: 31 Jan 2006

See all articles by Marcelo Dabos

Marcelo Dabos

affiliation not provided to SSRN

V. Hugo Juan-Ramón

International Monetary Fund (IMF)

Date Written: June 2000

Abstract

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.

Keywords: Export real exchange rate, capital inflow, terms of trade, productivity, equilibrium-correction model

JEL Classification: C13, C20, F31, F32

Suggested Citation

Dabos, Marcelo and Juan-Ramón, V. Hugo, Real Exchange Rate Response to Capital Flows in Mexico: An Empirical Analysis (June 2000). Available at SSRN: https://ssrn.com/abstract=879834 or http://dx.doi.org/10.2139/ssrn.879834

Marcelo Dabos (Contact Author)

affiliation not provided to SSRN

V. Hugo Juan-Ramón

International Monetary Fund (IMF)

700 19th Street NW
Washington, DC 20431
United States

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