Assessing the impact of the real exchange rate on Okun's misery index in Mexico

The exchange rate is among the main variables determining foreign trade, as it affects the prices of both exports and imports. Meanwhile, Okun's misery index (MI) attempts to synthesize the main issues affecting a society by combining two major macroeconomic variables - unemployment and inflation. This study examines how Mexico's bilateral real exchange rate index with the United States influences Okun's misery index from 2005Q1 to 2023Q3. A quantitative analysis considering both the long- and short-run relationship between Okun's MI and the real exchange rate was performed. The results show a unidirectional relationship between the exchange rate and the misery index in the long term, as indicated by the Toda-Yamamoto test. An unrestricted vector autoregressive model was used for the short-run analysis and found that depreciation increases the MI. A variance decomposition analysis shows that the real exchange rate considerably explains variations in the MI, whereas a historical decomposition analysis suggests that this relationship primarily occurs during periods of crisis.