Effects of Exchange Rate Uncertainty on Mexican Foreign Trade

The behavior of current account balance and the value of the domestic currency has been a focal point of much policy discussion for a long time. Most of the OECD countries have experienced volatile exchange rates as well as current account deficits for most of the last two decades. Conventional wisdom holds that appreciation of domestic currency leads to increased trade deficit and vice versa. This paper examines the long run equilibrium relation between exchange rate risk and the volume of foreign trade in Mexico. Mexico is one of the countries in Latin America that has been moving towards a free market economy, featuring free trade as the main driving force behind its endeavor for economic development. So, it is of keen interest to examine how the exchange rate fluctuations and its uncertainty has influenced the economy during such institutional changes.