Frequency-domain and time-varying asymmetric Granger causality between real effective exchange rates and remittances in Mexico

Abstract

The sheer size of remittances has fostered an interest in investigating the consequences of these flows, particularly in remittance-dependent economies. This study relies on monthly data from 1995M01 to 2021M05 and uses both frequency-domain and time-varying causality approaches to investigate the asymmetric causality relationships between real effective exchange rates and remittances in Mexico. Two key results are obtained. First, according to the frequency domain causality test results, positive shocks to remittances lead to appreciation in the Mexican peso in the medium- and long-run cycles, but negative shocks to remittances do not lead to depreciation in the Mexican peso, thus suggesting non-asymmetry. Second, the results of time-varying causality based on heterogeneous errors support asymmetric behavior between real effective exchange rates and remittances, underscoring the importance of allowing asymmetries when investigating the causal relationship.

KEYWORDS:

• Real effective exchange rates
• remittances
• asymmetry
• frequency domain causality
• time-varying causality
• Mexico

JEL Classifications:

• C22
• F22
• F31
• O54

Acknowledgments

The author is grateful to two anonymous journal reviewers for valuable comments and suggestions and to Emre Karabulutoglu for helping with data management. The author would also like to thank Victor Troster for sharing the Matlab codes to conduct a Granger-causality in quantiles.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.