Real Exchange Rate Response to Capital Flows in Mexico: An Empirical Analysis

25 Pages Posted: 6 Dec 2010

See all articles by Marcelo Pedro Dabos

Marcelo Pedro Dabos

Universidad de Belgrano

V. Hugo Juan-Ramon

affiliation not provided to SSRN

Date Written: July 6, 1998

Abstract

After the 1980s, capital flows have accelerated in the less developed countries and since Salter’s seminal paper in 1959, it has been widely accepted that the real exchange rate respond to capital flows. Based on a simple model derived by Sjaastad and Manzur (1996) along the lines of Salter (1959) and Rodriguez (1994), we estimated the long-run response of the export (and true) real exchange rate to capital inflows in Mexico for the period 1970:1–97:4, and for the subperiods prior and after the trade liberalization and other structural reforms initiated in 1984. We have also examined the short-term dynamic properties of a system involving capital inflows, the external terms of trade, and the real exchange rate and found that the system is a stable, true error correction model, and that deviations from equilibrium due to exogenous shocks are corrected in about 14 quarters. The empirical findings suggest that there exists a long-run relationship between the ratio of capital inflows to GDP, the external terms of trade, and the export (and the true) real exchange rate.

Keywords: real exchange rate, capital inflows, external terms of trade

JEL Classification: F21, F31, F32

Suggested Citation

Dabos, Marcelo Pedro and Juan-Ramon, V. Hugo, Real Exchange Rate Response to Capital Flows in Mexico: An Empirical Analysis (July 6, 1998). Available at SSRN: https://ssrn.com/abstract=1721161 or http://dx.doi.org/10.2139/ssrn.1721161

Marcelo Pedro Dabos (Contact Author)

Universidad de Belgrano ( email )

United States

V. Hugo Juan-Ramon

affiliation not provided to SSRN ( email )

No Address Available

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