Crucial exchange rate parity. Evidence for Mexico

Through a structural vector error correction model, one restricted cointegrating relationship for monthly data (1999.01–2012.04) was found between three exchange parities of great relevance for the Mexican economy: US Dollar–Euro, Mexican Peso–US Dollar, and Mexican Peso–Euro. The data's structure revealed endogeneity of the last one, but the first is the one that adjusts the long run (cointegrating) relation. A unitary elasticity of MxP–Euro parity to the other two parities was found, which validates PPP condition in absolute terms. These results are crucial to analyze the possible long run exchange effects on the Mexican real and financial variables because of the possible intensification of the Euro crisis and the currency war.

► Through a structural vector error correction model, one restricted cointegrating relationship for monthly data (1999.01–2012.04) was found between three exchange parities of great relevance for the Mexican economy: US Dollar–Euro, Mexican Peso–US Dollar, and Mexican Peso–Euro.
► The data's structure revealed endogeneity of the last one, but the first is the one that adjusts the long run (cointegrating) relation.
► It was found a unitary elasticity of MxP–Euro parity to the other two parities, which validates PPP condition in absolute terms.