This paper uses an error-correction model of Mexican inflation to decompose the real appreciation of the peso during 1988-1994 into that part attributable to the peso's initial underevaluation, that part explained by growing domestic demand, and that part attributable to backward-looking...

Considerable research has focused on explaining why currencies appreciate in real terms after the nominal exchange rate is stabilized, but this research generally has taken a theoretical approach, and rarely has tested its hypotheses empirically. In this paper I estimate a simple...

According to conventional models, flexible exchange rates play an equilibrating role in open economies, depreciating in response to adverse shocks, boosting net exports, and stimulating aggregate demand. However, critics argue that, at least in developing countries, devaluations are more...