Fundamentals of real exchange rate determination: What role in the peso crisis?
DOI:
https://doi.org/10.24201/ee.v21i1.160Keywords:
Real Exchange Rates, Purchasing Power Parity, Exchange Rate Crisis, CointegrationAbstract
We examine the role of structural factors in the Mexican real exchange rate experience since 1970, particularly in the crisis of December, 1994. We find that “fundamental” determinants of the real exchange –omitted from the previous research- are cointegrated with nominal exchange rates and relative prices, while tests of PPP alone fail. The cointegrating equation indicates a severe undervaluation during the 1980s and only modest overvaluation un the period immediately preceding the devaluation in December, 1994. Nothing in the fundamentals can account for magnitude of the blow Mexico suffered at that time.
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