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Exchange Rate Policy Credibility in Mexico, 1991-1994

By Carlos Alberto Ibarra

Abstract

An econometric examination of interest rate differentials reveals the existence of a significant relationship between the level of exchange rate policy credibility in Mexico during 1991-1994, and the country’s macroeconomic performance, the central bank international reserves and the NAFTA ratification. Interestingly, a steady fall in manufactures output growth tended to improve credibility, which suggests the existence of gains in the government’s disinflationary reputation. Additionally, it is argued that downward pressure on the domestic peso-dollar interest differential came from the exchange rate debt indexation of 1994 and the opening of the domestic bond market to foreign investment in December 1990.

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