Current account and real exchange rate equilibrium: the case of manufacturing in Mexico, 2001-2019

Abstract

In this paper, we follow Bresser-Pereira et al. (2021) and estimate for Mexico a a series of the real exchange rate (RER) that balances the current account for Mexico for the period 2001q1-2019q4. In this process we take into account numerous determinants, including policy variables and financial indicators the evolution of the terms of trade, as well as a proxi for the Balassa-Samuelson effects, inter alia. Our results show that in most of the period analyzed there has been a trend tendency towards overvaluation, with the RER fluctuating above its equilibrium level. With cointegrating methods, and dynamic ordinary least squared (DOLS) techniques, we examined the effects of exchange rate under and overvaluation on manufacturing; disaggregated in three sectors: i) technology intensive, ii) natural resource intensive and iii) labor intensive activities. Overall, our results indicate that the real exchange rate has a significant influence on the rate of expansion of Mexico’s manufacturing real GDP.

How important is the real exchange rate for exports and growth?

“…11. Other studies have found positive effects of RER undervaluation specifically on manufacturing investment (for example, Ibarra (2018) for Mexico and Marconi et al (2022) for Brazil), and one study has found a positive effect on manufacturing output (Nalín/Moreno-Brid 2022). These results suggest that RER depreciation can influence structural change in favor of the manufacturing sector, which can contribute to long-run growth.…”