Market Efficiency and Long Run Purchasing Power Parity Disequilibria of the Mexican Peso Under Changing Exchange Rate Regimes

Abstract

This paper tests if the efficient market version of Purchasing Power Parity (EMPPP) holds for the Mexican case for the 1970-2002 period in an environment of changing exchange rate regimes.Two regression analyses which extend PPP to a dynamic intertemporal model, based on market efficiency, are used, and in addition two unit root tests are applied. In general, the obtained empirical evidence does not support the EMPPP.Results suggest an inefficient market resulting from weak exchange rate policies and weak adoptions of several exchange rate regimes without proper inflation targeting and the application of strong and disciplined macroeconomic policies and structural changes.