Remittances–Exchange Rate Nexus: The U.S.–Mexico Case


This paper studies the long-run and short-run dynamics between emigrants’ nominal inbound remittances in U.S. dollar term to Mexico and the Peso-Dollar nominal exchange rates. Relatively high frequency monthly data from January 1987 through December 2008 are employed. Given the comparatively short sample period, the monthly data partially compensate for implementation of standard cointegration methodology. Empirically, both variables are found nonstationary in levels with I(1) behavior in terms of DF-GLS, Ng-Perron, and KPSS tests. The changes in exchange rate exert more pronounced influences on the changes of remittances in the long run as compared to the converse. Significant short-run interactive net positive feedback effects between the variables are also evidenced. On a net basis, Mexico should pursue an exchange rate policy that would promote remittance inflows from the USA for potential net economic gains without much apprehension of the so called Dutch Disease.