Macroeconomic fundamentals of the exchange rate. Evidence of cointegration

Using the autoregressive distributed lag (ARDL) cointegration technique, this paper examines the long-run validity of the monetary exchange rate model between the Mexican peso - USD exchange rate and its traditional monetary fundamentals (money supply, output, and interest rate differentials), incorporating the differential in the relative price of nontraded to traded goods, using quarterly data for the period 1994q1-2018q4. The estimated cointegrating coefficients were theoretically consistent with the monetary model, this evidence strongly supports the long-term monetary exchange rate model, and the results show that in the long term there is a Balassa-Samuelson effect.