Mexican Peso Research Articles

Mean Variance Causality between the Official and Parallel Currency Markets: Evidence from Four Latin American Countries

This paper examines the issue of mean and variance causality across four Latin American official and black markets for foreign currency using the corresponding monthly exchange rate against the US dollar for the period 1976-1993. Specifically, we apply an EGARCH-M model to study the behaviour of the Argentinian peso, the Brazilian cruzeiro, the Chilean peso and the Mexican peso against the US dollar. Furthermore, we apply a recent test due to Cheung and Ng (1996) in order to test for the existence of any causality and volatility spillovers among these official and black markets for foreign exchange. The main findings of the analysis are: (i) In contrast to the findings of previous studies using monthly rates, EGARCH-M processes characterize each bilateral exchange rate series in both markets; (ii) There is substantial evidence of causality in both mean and variance with the causality in mean largely being driven by the causality in variance; and (iii) The results indicate that the major exporter of causality is the Mexican black market with the black market of Argentina and the black and official markets of Brazil being the least contributors.

Penetration of the Mexican peso into U.S. retail operations: An examination of texas firms along the Mexican border

The use of a hard currency, such as the United States dollar, to purchase goods and services in foreign countries is a known practice. This paper examines the opposite, where the Mexican peso, traditionally a soft currency, is used to purchase goods and services in the United States. Three hundred retail firms were surveyed in the border region of Texas to ascertain whether or not they accepted pesos for payment. Almost 26% of the firms acknowledged that they do accept Mexican pesos. Included in this group were local, regional, and national businesses.

Labor Unions, Partisan Coalitions, and Market Reforms in Latin America. By Maria Victoria Murillo. Cambridge: Cambridge University Press, 2001. 250p. $59.95 cloth, $21.95 paper.

In February of 1995, following the disastrous December 1994 devaluation of the Mexican peso, which sent incomes down temporarily by as much as 60% and threw more than a million laborers out of work, the nonagenarian labor leader Fidel Velasquez issued a curious statement. He declared that each Mexican worker (earning on average at that time about six dollars a day) should pledge one day's pay toward Mexico's external debt to show solidarity with Mexico's 24 ailing billionaires, some of whom were now merely several-hundred-millionaires. In a country where jokes are often the most telling form of popular political commentary, nobody knew whether to laugh or cry at doddering Velasquez's exhortation. After all, his long record as an advocate of painful wage caps and government downsizing suggested that he actually might be serious.

Is There a Contemporaneous Relation Between Exchange Rates and Stock Prices? Evidence from Decisions to Allow the Mexican Peso and Thai Baht to Float

This paper estimates short horizon exchange rate sensitivity with an event study methodology. We look at stock price reactions to very large, unexpected exchange rate changes: the decisions to allow the Mexican peso and Thai baht to float. For both events, we find evidence of a statistically and economically significant contemporaneous relation. Our findings are consistent with the premise that the inability of much of the prior research to observe a contemporaneous relation between exchange rates and company value is due to methodological issues.

Characteristic time scales in the American dollar–Mexican peso exchange currency market

Daily fluctuations of the American dollar–Mexican peso exchange currency market are studied using multifractal analysis methods. It is found evidence of multiaffinity of daily fluctuations in the sense that the qth-order (roughness) Hurst exponent H q varies with changes in q. It is also found that there exist several characteristic time scales ranging from week to year. Accordingly, the market exhibits persistence in the sense that instabilities introduced by market events acting around the characteristic time scales (mainly, quarter and year) would propagate through the future market activity. Some implications of our results on the regulation of the dollar–mexpeso market activity are discussed.

A model of contagious currency crises with application to Argentina

This paper proposes a model of contagious currency crises where crises are transmitted across countries through a risk premium effect on government bonds. Three types of equilibria can occur in the model: a ‘no-collapse’ equilibrium in which a crisis is never transmitted from abroad, a ‘collapse’ equilibrium in which a crisis is inevitably contagious, and a ‘fundamentals’ equilibrium in which a crisis is contagious when domestic fundamentals are weak enough. The model is calibrated to the March 1995 Argentine crisis that followed on the heels of the December 1994 Mexican peso crisis. The results imply that the occurrence of the 1995 Argentine crisis reveals a combination of risk aversion of investors and weak credibility in the currency board arrangement. The Argentine crisis however could only be attributed to a ‘tequila effect’ alone (contagion from the Mexican crisis without any role for weak domestic fundamentals) if investors were excessively risk averse.

Contagion Effects from the 1994 Mexican Peso Crisis: Evidence from Chilean Stocks

The contagion, or informational spillover, effects of the 1994 peso crisis from the Mexican market to the Chilean market, and to the Chilean American Depository Receipts (ADRs) trading in the U.S., are examined. Significant excess returns are observed for Chilean stocks for the event dates of the Mexican Peso crisis, providing evidence of contagion effects. Significant excess returns on these Chilean ADRs are also observed for each of the five event dates associated with the Peso crisis, suggesting that the contagion effects spilled over to the ADRs. A multiple regression model shows that the spillover contagion effects were very efficiently transmitted from the Mexican market to the Chilean market to the Chilean ADRs. Multifactor regressions show that the most significant influence on the pricing of Chilean ADRs is the raw Chilean Index, rather than the Chilean Index expressed in U.S. dollars.

Thinking about the World Bank’s “accordion” geography of financial globalization

Abstract Two “flagship” World Bank reports, entitled The Long March—A Reform Agenda for Latin America and the Caribbean In The Next Decade (1997) and the World Development Report, 1999–2000 (2000), are the subject of this paper. Both publications attempt to come to terms with the policy and practice of structural adjustment in the context of a new geography of global finance. This paper argues that the geographical imagination employed in both World Bank reports is the product of a dominant statist geographical imagination that struggles to explain contemporary developments in the geography of money. The paper starts with a brief discussion of the Mexican peso and debt crisis, and the World Bank’s practice of structural adjustment. Through an interrogation of both World Bank papers, thought is then given to the purchase of territorialized state-based mappings of the global economy. The paper wraps up with a brief conclusion concerning the explanatory salience of scale. Internationally mobile capital is here to stay. Growing trade links, new communication technologies, and increasingly sophisticated financial products are making national borders more porous to financial flows. The challenge facing policymakers in developing countries is how to navigate through this financially integrating world ( World Development Report 1999-2000, 2000: 85 ). [W]hereas the horizons of the world of money and finance are global and deterritorialized, the political imagination seems wedded to territorialism and the borders of the nation state ( Leyshon &Thrift, 1997: 290 ).

Mexican Peso Futures and Exchange Rate Volatility

The reintroduction of Mexican peso futures contracts in April 1995 resulted from a refocus of governmental policy to the use of market-based mechanisms to stabilize the exchange rate. Interest in the Mexican peso future contracts has been high as investors look to manage their exposure from transactions and investments denominated in pesos. This study utilizes a VAR framework to analyze the relationship between the volatility in the Mexican peso spot market and futures contracts trading activity. Shocks to the exchange rate volatility lead to increased hedg-ing-type activity. Furthermore, an increase in futures contracts trading activity (reflecting additional speculation-type activity) results in a short-run increase in volatility. A Granger Causality test also indicates a statistically significant link between spot price volatility and futures trading activity in the Mexican peso exchange market. RESUMEN La reintroducción de los contratos futuros del peso mexicano en abril de 1995, resultó del nuevo enfoque de la política gubernamental de usar los mecanismos de mercado para estabilizar la tasa cambiaria. Ha habido mucho interés en los contratos futuros del peso mexicano, ya que los inversores buscan administrar su exposición a las transacciones e inversiones denominadas en pesos. Este estudio utiliza el marco del VAR para analizar la relación existente entre la volatilidad del peso mexicano en el mercado spot y la actividad de negociación de los contratos futuros. Los choques sufridos por la volatilidad de la tasa cambiaria resultan en un aumento de las actividades del tipo hedging. Además, un aumento en la actividad de negociación de los contratos futuros (que refleja otras actividades de naturaleza especulativa) provoca, a corto plazo, un aumento en la volatilidad. Una prueba Granger Causality también indica un vínculo estadísticamente significativo entre la volatilidad del precio spot y la actividad de negociación del mercado futuro en el mercado cambiario del peso mexicano. RESUMO A reintrodução dos contratos futuros em peso mexicano, em abril de 1995, foi o resultado de uma revisão da política governamental, em relação ao uso dos mecanismos baseados no mercado para estabilizar a taxa de câmbio. Os juros dos contratos futuros, em peso mexicano, foram altos, devido ao cuidado dos investidores em administrar o risco das transações e dos investimentos efetuados em pesos. Este estudo utiliza a estrutura VAR, para analisar o relacionamento entre a volatilidade do mercado local, em peso mexicano, e a atividade comercial de contratos futuros. Choques aplicados à volatilidade da taxa de câmbio contribuíram para o aumento das atividades típicas de hedging. Além disso, um crescimento da atividade comercial de contratos futuros (refletindo uma atividade basicamente especulativa) ocasiona um rápido aumento na volatilidade. O teste Granger Causality indica, também, um vínculo estatístico significativo entre a volatilidade do preço local e a atividade comercial de futuros no mercado cambial do peso mexicano.

THE EVOLUTION OF VAT RATES AND GOVERNMENT TAX REVENUE IN MEXICO

As a response to the 1994 Mexican peso crisis, in April 1995 the Mexican government increased the Value Added Tax (VAT) rate from 10 to 15%. More recently, policy makers have debated the potential economic impact of a reduction in the VAT rate on VAT revenue. Using a vector autoregression (VAR) model, this article analyzes the dynamics between government spending, inflation, the VAT rate, and VAT revenue in Mexico. The results from the estimated impulse response functions and variance decompositions indicate that VAT rate hikes lead to increases in government tax receipts. Further, tax collections play an important role in explaining movements in the rate of inflation in the Mexican economy. Overall, the findings are consistent with the view that increases (decreases) in the VAT rate result in larger (smaller) tax revenues.

Error correction exchange rate modeling: Evidence for Mexico

A set of error correction models are proposed for the nominal exchange rate between the Mexican peso and the United States dollar. The basic theoretical frameworks utilize balance of payments and monetary constructs. Empirical estimation results are fairly weak for both specifications irrespective of the interest rate variable selected. Although dynamic simulation properties of the equations are acceptable, in no case do they generate levels of accuracy that exceed those associated with a random walk.

International Migration Dynamics: The Role of Experience and Social Networks

This paper tests the dynamic implications of cumulative causation and network theory on the self‐sustaining nature of the migration process. A sequential migration model is derived and estimated with a panel of Mexican household heads for the years 1980–89. Consistently with cumulative causation and network theory, the empirical results show that, after controlling for unobserved heterogeneity, previous migration experience and migration‐related variables are the strongest predictors of current migration decisions. This persistence in migration patterns implies that immigration policies inducing small changes in expected costs and benefits of US work fail to prevent entry into, or encourage exit from, the US labor market by experienced migrants. However, large temporary disruptions such as the 1994 Mexican peso devaluation may permanently increase migratory flows by inducing new migrants to enter the US labor market.

The Political Geography of World Financial Reform: Who Wants What and Why?

Since the devastating East Asian crisis of 1997-99 we have seen many headlines, and the formation of numerous blue ribbon and multinational commissions, asserting the need to the world's financial architecture, the latter phrase having replaced the more mundane monetary and exchange rate arrangements. The purpose of this essay is to demystify some of the major reform proposals, and to understand which countries and interests back them. I suggest that the reforms proposed by a loose coalition of financial stabilizers make the most sense on economic efficiency grounds, but that the bargaining structure of the issue arena is such that the reforms most likely to be implemented are those of the transparency advocates. The current debate results from a series of high profile crises in the 1990s. In 1992-93 troubles in Western Europe's Exchange Rate Mechanism (ERM) cost the German government at least $1 billion and the Swedish government as much as $26 billion and brought fame and wealth to financier George Soros, who correctly bet against the British pound sterling. In 1994-95 the Mexican peso crisis and subsequent tequila effect devastated emerging markets throughout Latin America and other countries as far flung as Canada and the Philippines. And in 1997-99 the East Asian crisis brought down Indonesia's Suharto after thirty years in power, and rocked the economies of several of the much-admired Asian tigers. Less noticed outside circles was the eleventh hour weekend rescue of Long-Term Capital Management, a little known American hedge fund, in Fall 1998, just after the Russian crisis and just prior to the Brazilian one. The rescue relied on voluntary contributions of funds from major private U.S. banks, but was urgently coordinated by Gerald Corrigan, president of the New York Federal Reserve Bank. These events spawned a flurry of commissions and studies.

Restaurant Prices and the Mexican Peso

Of prime interest to border economies is exchange rate performance and currency valuation. Commonly used tools for this task include purchasing power parity (PPP) nominal benchmarks, and inflation‐adjusted trade‐weighted indices. The latter have the advantage of relying on commonly available international macroeconomic data but overlook microeeonomic information that may offer additional insight to issues surrounding exchange rate policy debates. Other efforts have utilized small samples of international product price comparisons to shed light on currency valuation questions. This paper develops one such tool by repeated sampling of prices charged for identical menu items sold at restaurant franchises in El Paso, Texas, and Ciudad Juárez, Chihuahua. A battery of statistical tests indicate that the international currency value of the peso consistently differed from the exchange rate implied by the border region restaurant price ratios in 1997, 1998, and 1999.

Trading rule profits in Latin American currency spot rates

The efficiency of foreign exchange markets has received extensive attention in the literature in recent years, especially with regard to technical trading. We extend the existing evidence on this topic by applying the moving average (MA) and channel (CH) trading rules to 13 Latin currencies to see if opportunities for profitable trading exist. Our results show that although not all of the Latin American currencies can be exploited through the use of trading rules that we use, there are some that appear amenable to our technical analysis. Specifically, the results suggest that MA trading rules are profitable for four currencies, namely the Brazilian real, the Mexican peso, the Peruvian new sol, and the Venezuelan bolivar. We further find that CH rules are profitable for the Brazilian real, the Mexican peso, and the Venezuelan bolivar. Our results suggest that due to differences in the statistical properties of exchange rates, some trading rules may be more suitable for certain types of currencies.

The Mexican Crisis and the Maquiladora Boom A Paradox of Development or the Logic of Neoliberalism?

Despite all the warning signs, the world of finance was caught off guard by the collapse of the Mexican peso in December 1994. The ensuing devaluation was followed by the largest bailout by the International Monetary Fund (IMF) until then, and by early 1995 Mexico was in its most serious depression since the 1930s (Barkin and Rosen, 1997: 24). Through 1995, Mexico endured significant negative rates of growth and waves of bankruptcies. In addition, the population experienced a decline of real wages, which dropped by 27 percent between 1994 and 1996 (EPI, 1997: 14). This led to a significant increase in poverty: an estimated 75 percent of Mexican families could not afford the basic goods required to raise them above the official poverty line (Barkin and Rosen, 1997: 24). Local manufacturing was also severely affected, as was evidenced by the increase of bankruptcies in the manufacturing sector. In stark contrast to the -6.2 percent growth rate for the overall Mexican economy, the maquiladora industryl expanded by 30 percent in 1995 (IMF, 1998; INEGI, 1997). In fact, the sector grew from 2,200 plants with 550,000 workers at the end of 1994 to over 3,000 plants employing over 800,000 workers in 1996 (INEGI, 1997).2 The stakes for Mexico in the success of the maquiladora industry are high, as the foreign exchange generated by the sector has become the largest source of foreign revenues, surpassing oil in 1999. This helps to explain Mexico's

Managing a labor strike at a maquiladora industry ‐ A case study

ABC Consumer Electronics is headquartered in the USA, with major operations in Mexico. During the Mexican peso devaluation and economic crisis of late 1994, the company faced the greatest labor problem of its long history. The workers’ purchasing power was reduced to nearly one‐half of its value before the crisis. Other underlying and un‐addressed problems at ABC were brought to surface by workers who found themselves incapable of providing the basic necessities of life for themselves and their families. This paper explores the manner in which ABC handled the strike, how the strike affected ABC’s operations and strategies; and the impact of ABC’s decisions on other maquiladoras in Juarez, Mexico is fully explained and delineated. The case’s arguments are supported by the collection of field‐based data, the company’s archival records, numerous interviews, and the US and Mexican statistical abstracts.

Toward a North American Community: Lessons from the Old World for the New

The Mexican peso crisis struck in late December 1994, coinciding with a new Mexican administration and the end of the first year of the American Free Trade Agreement (NAFTA). The crisis poignantly highlighted the success and the inadequacy of the treaty--success in the expansion of trade and capital flows, and inadequacy in institutional capacity. The Canadian, Mexican, and US governments defined the agreement so narrowly that they failed to devise a mechanism that could monitor, anticipate, plan, or even respond to such a serious problem. The president of Mexico, Vicente Fox, has boldly proposed transforming the free trade area into a common market like Europe's. In this visionary study, Robert A. Pastor seizes Fox's idea and maps out the paths toward making it a reality. He analyzes NAFTA's successes and shortcomings, extracts lessons from the European Union's 40 years of reducing disparities between rich and poor countries, and proposes ways that NAFTA can adapt and incorporate those lessons. The centerpiece of the book is a detailed proposal for new institutions and North American plans for infrastructure and transportation, immigration and customs, and projects aimed at lifting the poorer regions.This book is the first to propose a detailed approach to a American Community--different from the European Common Market but drawing lessons from its experience. It will be of considerable interest to policymakers as well as researchers and students of international political economy, world trade, and foreign affairs.

Institutional investors and Polanyi's double movement: a model of contemporary currency crises

This article constructs a model of contemporary currency crises which incorporates the role played by institutional investors and the dynamics associated with Karl Polanyi's notion of the 'double movement'. Polanyi's double movement, and its recognition of the need to integrate politics with economics, is used to explain why so many governments are prone to pursue policies that lead to a speculative attack against fixed exchange rates and why virtually every modern fixed exchange rate regime has ended in crisis. Evidence on the short-term and herd behaviour of institutional investors is used to explain why contemporary currency crises do not appear to be justified by underlying economic fundamentals and why these crises do so much more damage than their earlier counterparts. The model is then applied to the 1992 European Exchange Rate Mechanism crisis, the 1994 Mexican peso crisis and the 1997 East Asian crisis. While recognizing that variations exist in the specific circumstances of each episode, the argument of this article is that the progression of events do seem to conform to the model presented.

Market efficiency, the Mexican peso crisis, and the US bank stock returns: An application of the event parameter method

This paper examines the impact of the 1994 Mexican peso crisis on US bank returns using an event parameter approach. The event parameter approach explicitly predicts the stochastic return generating process on the occurrence or nonoccurrence of specific events. The event parameter method assumes that only the intercept term may vary between the estimation and analysis periods. Specifically, this study will examine two pairs of hypotheses, new information vs. information leakage and rational pricing vs. investor contagion, in the context of the 1994 Mexican peso and banking crisis. The empirical results support the new information hypothesis, which states that US stock prices reacted quickly to events related to the Mexican peso crisis. This research has also found evidence for bank contagion, although these did not spill over to other banks. The US government and international agencies acted promptly to contain the effect of the Mexican peso and banking crisis spreading to the US and to other Latin American countries.