Exchange rate premia and discounts for retail purchases using Mexican pesos in El Paso, Texas

Abstract

This paper studies the exchange rates at which Mexican pesos are accepted for retail purchases in El Paso, Texas. A stratified random sample of 586 participating firms is surveyed to examine two aspects of reverse dollarization in the El Paso/Ciudad Juárez border region. The first is to determine the percentage of retail businesses in El Paso that accept foreign currency in the form of Mexican pesos. The results suggest that just over 13.1% (77/586) of all retail firms in this market accept pesos, which on average, comprise 4.35% of total sales for those firms. The second is to calculate the effective exchange rate at which firms accept Mexican pesos. We find that 68.5% of firms accepting the peso do so at a premium. We discern these two aspects further utilizing various multivariate analyses.

Acknowledgements

Financial support for this research was provided by El Paso Electric Company, Hunt Companies of El Paso, Hunt Communities, Texas Department of Transportation, JPMorgan Chase Bank of El Paso, a UTEP College of Business Administration Faculty Research Grant, and the James Foundation Scholarship Fund. Helpful comments were provided by Jim Holcomb, Santiago Ibarreche, and Angel Molina. Econometric research assistance was provided by Sergio Contreras, Karen Fierro, Azucena Gonzalez, Joseph Kababie, Enedina Licerio, Carlos Lino, Teodulo Soto, and Emmanuel Villalobos.

Notes

1 We wish to thank an anonymous reviewer for directing us to niche width theory within population ecology.

2 A soft currency is one not normally accepted in international transactions. A hard currency on the other hand is generally accepted in international transactions. The Mexican peso is a soft currency and the U.S. dollar is a hard currency.

3 These markets segments were selected building upon and extending the work of Yoskowitz and Pisani (2002).

4 Tortillerías are food manufacturers which specialize in the production of tortillas and like products. These types of firms are common on the U.S.–Mexican border.

5 Our in-person survey administration contrasts with Yoskowitz and Pisani (2002) who utilized a phone survey in their previous study of currency substitution.

6 For the survey period, the median exchange rate was 10.94 pesos per dollar with a high of 13.92 pesos per dollar and a low of 9.92 pesos per dollar. The peso/dollar exchange rate data were retrieved from the Banco de México central bank database for the 17 July 2008–16 December 2008 sample period of the survey.

7 Available at: http://www.banxico.org.mx/.

8 This analysis is available from the first author upon request.

9 Fullerton et al. (2009) found a 12.9% decrease in the acceptance of pesos for every mile a retailer was located further away from the U.S.–Mexico border.

10 Fullerton et al. (2009) discovered that for every percentage point increase in Spanish-speaking staff for El Paso retailers, the likelihood of accepting pesos increases 1.1%. This pattern did not transfer to the determination of exchange rate premia or discount (as found in Tables 4 and 5), the analysis of which is available from the first author upon request.

11 U.S. dollar usage is nearly universally accepted in northern Mexican border communities (see Pisani et al., 2008).

12 We thank one anonymous reviewer for suggesting the cultural connection.