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Andre Mollick
 
''EFFECTS OF U.S. INTEREST RATES ON THE REAL EXCHANGE RATE IN MEXICO''
( 2002, Vol. 6 No.3 )
 
 
Using monthly data to bond and equity markets in Mexico from U.S. investors, we search for responses in the vector autoregressions (VARs) - on the real exchange rate and reserves in Mexico - to shocks in U.S. interest rates and to the Mexican M2/Reserves ratio over the years 1988-2001. The ratio M2/Reserves measures the degree of financial vulnerability and brings this literature closer to theoretical constructions. Shocks to U.S. interest rates explain not more than 7.4% of the variance of international reserves and only 5.5% of real exchange rate changes under conventional specifications. Blending M2/Reserves with real exchange rates at the end of the VAR, external shocks explain 12.5% of the variance of real exchange rate one year after the shock and 12.8% of the variance of M2/Reserves. Typically, the responses in Mexico of U.S. interest rate shocks are as expected: higher shocks to U.S. interest rates move Mexican M2/Reserves up, depreciating the real exchange rate in Mexico.
 
 
Keywords:
JEL: F3 - International Finance: General
F4 - Macroeconomic Aspects of International Trade and Finance: General
 
Manuscript Received : May 02 2002 Manuscript Accepted : May 10 2002

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