An Estimation of the Mexican Peso´s Overvaluation for 2023

Abstract

We estimate the overvaluation of the Mexican peso for the second quarter and June 2023. The equilibrium real exchange rate is approximated by reestimating a cointegration equation where the variable of interest depends on Mexico's GDP, the US Industrial Production Index, the sum of private consumption, the government consumption and exports of Mexico, and US private fixed investment. We use these variables to approximate the relative supply and demand of the two countries. Under certain assumptions, we estimate that the Mexican peso is overvalued by 13.7% and 15.3% in the second quarter and in June 2023, respectively, with information available as of mid-July of the same year. We provide an estimate of the nominal exchange rate compatible with the elimination of the exchange rate misalignment, if this variable were the only one that adjusts.