An Exploration of the Relative Influence of the Determinants of the Mexican Peso - U.S. Dollar Exchange Rate

This article examines the impact over time of the government’s primary balance, remittances, foreign direct investment expectations, and real interest rates on the Mexican peso to US dollar exchange rate between 2003 and 2023, using monthly and quarterly data. An autoregressive distributed lag model with bounds testing and a Granger non-causality test are employed. The results indicate that, although the significance of all variables changes over time, foreign direct investment expectations and the government’s primary balance influence the exchange rate throughout the entire period. Foreign direct investment expectations and remittances exert the most persistent long- and short-run influence, respectively. The evolving significance across time of these determinants implies the need of a dynamic and adaptable policy framework to currency stability in Mexico.