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New evidence on the monetary approach of exchange rate determination in Mexico 1994-2007: A cointegrated SVAR model

By Eduardo Loría, Armando Sánchez and Uberto Salgado

Abstract

We provide empirical evidence supporting the validity of both short and long run versions of the Monetary Approach of Exchange Rate determination for the Mexican peso-U.S. dollar exchange rate from 1994 to 2007 using a cointegrated SVAR model. We estimate not only the long-run relationship, between the variables of the monetary model for the exchange rate, but also the very short run effects which have been often ignored in previous empirical work. We show that there are robust short and long-run relationships between the Mexican monetary aggregates and the exchange rate, which ultimately responds to what Bilson's variant of MAER predicts.Monetary approach to exchange rate (MAER) Mexico Fundamentals Exchange rate PPP SVAR

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