Oil price, the fundamentals and the exchange rate in Mexico
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In this article we offer empirical evidence about the direct and indirect impact channel that crude oil prices have on exchange rate variations in Mexico. We use quarterly time series data for the period between 1997 and 2019 and a system of simultaneous co-integrated equations. Our results suggest that an increase in the price of crude oil produces a foreign exchange appreciation (direct channel); likewise, this rise in the price of oil increases government revenues - via oil revenues -, which causes an improvement in the fiscal balance and, in turn, causes an appreciation of the exchange rate (indirect channel).
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In this article we offer empirical evidence about the direct and indirect impact channel that crude oil prices have on exchange rate variations in Mexico. We use quarterly time series data for the period between 1997 and 2019 and a system of simultaneous co-integrated equations. Our results suggest that an increase in the price of crude oil produces a foreign exchange appreciation (direct channel); likewise, this rise in the price of oil increases government revenues - via oil revenues -, which causes an improvement in the fiscal balance and, in turn, causes an appreciation of the exchange rate (indirect channel).