Why does the peso-dollar exchange rate show a depreciation trend? The role of productivity differentials

Arnoldo López-Marmolejo and Daniel Ventosa-Santaulària
Authors registered in the RePEc Author Service: Arnoldo López Marmolejo

Economic Modelling, 2019, vol. 80, issue C, 158-170

Abstract: Over the last three decades, Mexico's macroeconomic policy has been driven by a sound orthodox strategy: an open economy via many trade agreements signed since the mid-1980s, a nominal exchange rate under a flexible regime since 1994, central bank autonomy, and responsible fiscal policy, among other benchmarks. Nevertheless, the exchange rate has continued on a path of depreciation against the US dollar. In this paper, we show that although an equilibrium relationship exists between the exchange rate and prices in Mexico and the US (its main commercial partner), there are other forces affecting the former. The main factor in this relentless long-term depreciation is the loss of productivity in Mexico relative to the US. In addition, we show that the extraordinary liquidity supplied by the US during the 2008 crisis caused the Mexican peso to appreciate against the dollar.

Keywords: Nominal exchange rate; Productivity; Federal reserve assets; Prices (search for similar items in EconPapers)
JEL-codes: C13 C22 E24 O11 O19 O47 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Why Does the Peso-Dollar Exchange Rate Show a Depreciation Trend?: The Role of Productivity Differentials (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:80:y:2019:i:c:p:158-170

DOI: 10.1016/j.econmod.2018.11.004

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