SHORT‐RUN AND LONG‐RUN DETERMINANTS OF THE REAL EXCHANGE RATE IN MEXICO

Antonia López Villavicencio and Josep Lluís Raymond Bara
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Antonia López Villavicencio: UAB - Universitat Autònoma de Barcelona = Autonomous University of Barcelona = Universidad Autónoma de Barcelona
Josep Lluís Raymond Bara: UAB - Universitat Autònoma de Barcelona = Autonomous University of Barcelona = Universidad Autónoma de Barcelona

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Abstract: This paper explores the real exchange rate behavior in Mexico from 1960 until 2005. Since the empirical analysis reveals that the real exchange rate is not mean reverting, we propose that economic fundamental variables affect its evolution in the long run. Therefore, based on equilibrium exchange rate paradigms, we propose a simple model of real exchange rate determination, which includes the relative GDP per capita, the real interest rates, and the net foreign assets over a long period of time. Our analysis also considers the dynamic adjustment in response to shocks through impulse response functions derived from the multivariate vector autoregressive (VAR) model.

Keywords: F31; F41; F49; bounds cointegration test. JEL classification: C32; error correction models; Balassa-Samuelson effect; purchasing power parity; real exchange rate; real exchange rate purchasing power parity Balassa-Samuelson effect error correction models bounds cointegration test. JEL classification: C32 F31 F41 F49 (search for similar items in EconPapers)
Date: 2008-01-31
Note: View the original document on HAL open archive server: https://hal.science/hal-05455659v1
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Published in Developing Economies, 2008, 46 (1), pp.52-74. ⟨10.1111/j.1746-1049.2007.00055.x⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05455659

DOI: 10.1111/j.1746-1049.2007.00055.x

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