Current account and real exchange rate equilibrium: the case of manufacturing in Mexico, 2001-2019

Lorenzo Nalin () and Juan Carlos Moreno-Brid ()

Brazilian Journal of Political Economy, 2022, vol. 42, issue 4, 914-933

Abstract: In this paper, we follow Bresser-Pereira et al. (2021) and estimate for Mexicoa a series of the real exchange rate (RER) that balances the current account for Mexico forthe period 2001q1-2019q4. In this process we take into account numerous determinants,including policy variables and financial indicators the evolution of the terms of trade, aswell as a proxi for the Balassa-Samuelson effects, inter alia. Our results show that in mostof the period analyzed there has been a trend tendency towards overvaluation, with theRER fluctuating above its equilibrium level. With cointegrating methods, and dynamicordinary least squared (DOLS) techniques, we examined the effects of exchange rate under and overvaluation on manufacturing; disaggregated in three sectors: i) technology intensive,ii) natural resource intensive and iii) labor intensive activities. Overall, our results indicatethat the real exchange rate has a significant influence on the rate of expansion of Mexico’smanufacturing real GDP. JEL Classification: C22; E44; F31; O24.

Keywords: Real exchange rate equilibrium; current account; manufacturing activity; Mexico (search for similar items in EconPapers)
Date: 2022
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