Effects of Volatility of the Exchange Rate on Inflation Expectations and Growth Prospects in Mexico (2002-2014)

Guillermo Benavides, Isela Elizabeth Téllez-León, Francisco Venegas-Martínez

Abstract


This paper is aimed at assessing the impact of exchange rate volatility on inflation expectations and economic growth prospects in Mexico. In order to examine whether there is some degree of causality, we will be using standard multivariate volatility models. The goal of this research is to measure the direction of causality, that is, we will analyze, econometrically, potential relationships in both directions. The main finding is that there is only a statistically significant relationship between the exchange rate volatility and the volatility of inflation expectations, while no statistically significant association with growth prospects was found; these results provide important information that could be used in monetary policy design.


Keywords


Exchange Rate Volatility; Monetary Policy; Time Series Analysis

Full Text:

PDF

References


Albuquerque, C. R., and Portugal, M. S. (2006). “Testing nonlinearities between Brazilian exchange rate and inflation volatilities”. Revista Brasileira de Economia, 60(4), 325-351.

Andrews, D. W. K. (1993). “Tests for Parameter Instability and Structural Change with Unknown Change Point”. Econometrica, 61(4), 821-856.

Baba, Y., Engle, R. F. Kraft, D. E., and Kroner, K. (1990). “Multivariate Simultaneous Generalized ARCH”. Mimeo, Department of Economics, University of California, San Diego.

Backus, D. K., and Kehoe, P. J. (1992). “International Evidence on The Historical Properties of Business Cycles”. American Economic Review, 82(4), 864-888.

Bai, J., and Perron, P. (2003). “Computation and Analysis of Multiple Structural Change Models”. Journal of Applied Econometrics, 6(1), 72-78.

Barone-Adesi, G., and Yeung, B. (1990). “Price Flexibility and Output Volatility: The Case for Flexible Exchange Rates”. Journal of International Money and Finance, 9(3), 276-298.

Barro, R. J., and Gordon, D. B. (1983). “Rules, Discretion and Reputation in A Model of Monetary Policy”. Journal of Monetary Economics, 12(1), 101-121.

Berndt, E. K., Hall, B., Hall, R., and Hausman, J. (1974). “Estimation and Inference in Nonlinear Structural Models”. Annals of Economic and Social Measurement, 3(4), 653-665.

Bleaney, M., and Fielding, D. (2002). “Exchange Rate Regimes, Inflation and Output Volatility in Developing Countries”. Journal of Development Economics, 68(1), 233-245.

Bollerslev, T. (1990). “Modeling the Coherence in Short- Run Nominal Exchange Rates: A Multivariate Generalized ARCH Model”. The Review of Economics and Statistics, 72(3), 498–505.

Bollerslev, T. P., Chou, R. Y., and Kroner, K. F. (1992). “ARCH Modelling in Finance: A Review of the Theory and Empirical Evidence”. Journal of Econometrics, 52(1), 5-59.

Bollerslev, T., Engle, R. F., and Wooldridge, J. M. (1988). “A Capital Asset Pricing Model with Time-Varying Covariances”. The Journal of Political Economy, 96(1), 116-131.

Calvo, G. A., and Reinhart, C. M. (2000a). “Fear of floating”. NBER Working Paper No. 7993.

Calvo, G. A., and Reinhart, C. M. (2000b). “Fixing for your life”. NBER Working Paper No. 8006.

Caporale, G. M., and Pittis, N. (1995). “Nominal Exchange Rate Regimes and the Stochastic Behavior of Real Variables”. Journal of International Money and Finance, 14(3), 395-415.

Chen, N. (2004). “The Behaviour of Relative Prices in The European Union: A Sectoral Analysis”. European Economic Review, 48(6), 1257-1286.

Devereux, M. B., and Engel, C. (2002). “Exchange Rate Pass-Through, Exchange Rate Volatility, and Exchange Rate Disconnect”. Journal of Monetary Economics, 49(5), 913-940.

Engle, R. F. (1982). “Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of UK. Inflation”. Econometrica, 50(4), 987–1008.

Engle, R. (2002). “Dynamic Conditional Correlation-A Simple Class of Multivariate GARCH Models”. Journal of Business and Economic Statistics, 20(3), 339-350.

Engle, R. F., and Kroner, K. (1995). “Multivariate Simultaneous Generalized ARCH”. Econometric Theory, 11(1), 122-150.

Engel, C., and Rogers, J. H. (2001). “Deviations from Purchasing Power Parity: Causes and Welfare Costs”. Journal of International Economics, 55(1), 29-57.

Flood, R. P., and Rose, A. K. (1995). “Fixing Exchange Rates a Virtual Quest for Fundamentals”. Journal of Monetary Economics, 36(1), 3-37.

Hammoudeh, S., and Li, H. (2008). “Sudden changes in volatility in emerging markets: The case of Gulf Arab markets”. International Review of Financial Analysis, 17(1), 47–63.

Hausmann, R., Panizza, U., and Stein, E. (2001). “Why Do Countries Float the Way They Float?”. Journal of Development Economics, 66(2), 387-414.

Kočenda, E., and Poghosyan, T. (2009). “Macroeconomic sources of foreign exchange risk in new EU members”. Journal of Banking & Finance, 33(11), 2164-2173.

Levy-Yeyati, E. L., and Sturzenegger, F. (2001). “To float or to trail: evidence on the impact of exchange rate regimes”. UTDT, CIF Working Paper, (1/01).

Parsley, D. C., and Wei, S. J. (2001). “Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography”. Journal of International Economics, 55(1), 87-105.

Quandt, R. E. (1960). “Tests of the Hypothesis that A Linear Regression System Obeys Two Separate Regimes”. Journal of the American Statistical Association, 55(290), 324-30.

Shephard, N., and Andersen, T. G. (2009). Stochastic Volatility: Origins and Overview. In Andersen, T.G., Davis, R.A., Kreiss, J.-P. and Mikosch, T.(Eds.), Handbook of Financial Time Series (233–253).


Contador de visualizaciones:

  • Abstract : 24 vistas.
  • PDF : 9 vistas.
  • Refbacks

    • There are currently no refbacks.


    Copyright (c) 2015 Ensayos Revista de Economía (Ensayos Journal of Economics)

    Creative Commons License
    This work is licensed under a Creative Commons Attribution 4.0 International License.

    Información Legal
    Ensayos Revista de Economía, Vol. 36, No. 1, Mayo 2017, es una publicación semestral editada por la Universidad Autónoma de Nuevo León, a través de la Facultad de Economía con la colaboración del Centro de Investigaciones Económicas, Av. Lázaro Cárdenas 4600 Ote., Fracc. Residencial Las Torres, Monterrey, N.L. C.P. 64930. Tel. +52 (81) 8329 4150 Ext. 2463 Fax. +52 (81) 8342 2897. Editor Responsable: Daniel Flores Curiel, Reserva de Derechos al Uso Exclusivo No. 04-2015-091013542400-203, ISSN 2448-8402, ambos otorgados por el Instituto Nacional del Derecho de Autor. Responsable de la última actualización de este Número, Facultad de Economía UANL, M.C. Hans Y. Martinez Torres, Av. Lázaro Cárdenas 4600 Ote., Fracc. Residencial Las Torres, Monterrey, N.L. C.P. 64930. Tel. +52 (81) 8329 4150. Fecha última de actualización 9 de Mayo de 2017.

    Las opiniones y contenidos expresados en los artículos son responsabilidad exclusiva de los autores.

     Licencia de Creative Commons

    El contenido de Ensayos Revista de Economía está bajo términos de la licencia de Creative Commons Reconocimiento 4.0 Internacional.