IMF Working Papers

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

Author/Editor:

Hoe Ee Khor ; Liliana Rojas-Suárez

Publication Date:

January 1, 1991

Summary:

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.

Series:

Working Paper No. 1991/012

Subject:

Domestic debt Exchange rate adjustments Exchange rates External debt Financial services Foreign exchange Interest rate parity Public debt

Notes:

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. Also published in Staff Papers, Vol. 38, No. 4, December 1991.