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EFFECTS OF U.S. INTEREST RATES ON THE REAL EXCHANGE RATE IN MEXICO

Andre Mollick ()

Economics Bulletin, 2002, vol. 6, issue 3, 1-15

Abstract: Using monthly data to bond and equity markets in Mexico from U.S. investors, we search for responses in the vector autoregressions (VARs) - on the real exchange rate and reserves in Mexico - to shocks in U.S. interest rates and to the Mexican M2/Reserves ratio over the years 1988-2001. The ratio M2/Reserves measures the degree of financial vulnerability and brings this literature closer to theoretical constructions. Shocks to U.S. interest rates explain not more than 7.4% of the variance of international reserves and only 5.5% of real exchange rate changes under conventional specifications. Blending M2/Reserves with real exchange rates at the end of the VAR, external shocks explain 12.5% of the variance of real exchange rate one year after the shock and 12.8% of the variance of M2/Reserves. Typically, the responses in Mexico of U.S. interest rate shocks are as expected: higher shocks to U.S. interest rates move Mexican M2/Reserves up, depreciating the real exchange rate in Mexico.

JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2002-05-10
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Citations: View citations in EconPapers (2)

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