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SHORT‐RUN AND LONG‐RUN DETERMINANTS OF THE REAL EXCHANGE RATE IN MEXICO
Author(s) -
LÓPEZ VILLAVICENCIO Antonia,
RAYMOND BARA Josep Lluís
Publication year - 2008
Publication title -
the developing economies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.305
H-Index - 30
eISSN - 1746-1049
pISSN - 0012-1533
DOI - 10.1111/j.1746-1049.2007.00055.x
Subject(s) - exchange rate , economics , impulse response , econometrics , short run , autoregressive model , per capita , effective exchange rate , real interest rate , net foreign assets , real gross domestic product , vector autoregression , mean reversion , monetary economics , interest rate , current account , mathematics , mathematical analysis , population , demography , sociology
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.