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Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness

Author

Listed:
  • Hoe Ee Khor
  • Ms. Liliana Rojas-Suárez

Abstract

This paper explores how interest rates on domestic financial assets in Mexico are linked to expectations of exchange rate changes and to perceptions about the default risks contained in Mexico’s external debt. It is shown that the interest rate differentials between peso- and U.S. dollar-denominated domestic assets reflected some concerns about the exchange rate policy during the period under study. In addition, the evidence suggests that the interest rate on a U.S. dollar-denominated Mexican domestic asset is linked (i.e., cointegrated) to the yield implicit in the secondary market price for external debt issued by Mexico.

Suggested Citation

  • Hoe Ee Khor & Ms. Liliana Rojas-Suárez, 1991. "Interest Rates in Mexico: The Role of Exchange Rate Expectations and International Creditworthiness," IMF Working Papers 1991/012, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1991/012
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    Cited by:

    1. Hernández, Juan R., 2020. "Covered Interest Parity: A Stochastic Volatility Approach to Estimate the Neutral Band," MPRA Paper 100744, University Library of Munich, Germany.
    2. Hernández, Juan R., 2014. "Peso-Dollar Forward Market Analysis: Explaining Arbitrage Opportunities during the Financial Crisis," MPRA Paper 100653, University Library of Munich, Germany.
    3. Kaminsky, Graciela L. & Leiderman, Leonardo, 1998. "High real interest rates in the aftermath of disinflation: is it a lack of credibility?," Journal of Development Economics, Elsevier, vol. 55(1), pages 191-214, February.
    4. Liliana Rojas‐Suárez & Sebastián Sotelo, 2007. "The Burden Of Debt: An Exploration Of Interest Rate Behavior In Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 25(3), pages 387-414, July.
    5. Bush Georgia, 2019. "Bank foreign currency funding and currency markets: the case of Mexico post GFC," Working Papers 2019-01, Banco de México.
    6. Hernández Juan R., 2014. "Peso-Dollar Forward Market Analysis: Explaining Arbitrage Opportunities during the Financial Crisis," Working Papers 2014-09, Banco de México.

    More about this item

    Keywords

    WP; interest rate differential; U.S. dollar; secondary market market price; interest rates in Mexico; secondary market price; domestic interest rates; risk-free interest rate; Interest rate parity; Exchange rate adjustments; Exchange rates; Domestic debt;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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