The Medium-Run Equilibrium Exchange Rate, Remittances, and External Adjustment in Mexico
DOI:
https://doi.org/10.21919/remef.v21i2.1543Keywords:
Exchange rate, Remittances, Balance of trade, Current account, Vector Error Correction ModelAbstract
This study examines the influence of the trade balance and remittances on the Mexican peso–U.S. dollar exchange rate. To this end, a Vector Error Correction (VECM) model is estimated, incorporating key macroeconomic variables such as the interest rate, inflation, potential Gross Domestic Product (GDP), current account, terms of trade, and remittances. The model accounts for Johansen’s cointegration approach and captures the long-run equilibrium relationships among the variables. The empirical results provide evidence of cointegration, reveal dynamic adjustments to shocks through impulse response functions, and indicate that remittances exert a limited effect on the exchange rate, which primarily adjusts in response to movements in the current account and other macroeconomic fundamentals. The study is limited by the non-static nature of exchange rate dynamics but has important policy implications in the context of recent migration policies and the fiscal treatment of remittances by the U.S. government. The novelty of the study lies in explicitly assessing the role of remittances, which are not an effective exchange rate stabilization mechanism, and shows that external adjustment in Mexico operates mainly through the current account.
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