NCPA - National Center for Policy Analysis

Mexico's Monetary Course

December 20, 1996

Some economists say that the Mexican peso is so overvalued the Mexican government should depreciate the currency to offset rising prices and ensure that its exports remain competitive in U.S. and other markets. Others disagree.

The dissenters contend that Mexico should follow the example of Hong Kong.

  • Since about 1984, the exchange rate of the Hong Kong dollar has been rock solid -- even appreciating a bit against the U.S. dollar.
  • Over the same period its consumer price index soared 141 percent -- versus 51 percent in the U.S.
  • By the logic of those who want Mexico to devalue its currency, Hong Kong should do the same, since it must be "overvalued" by about 90 percent.
  • However Hong Kong's economic output has more than tripled and exports have soared more than 500 percent.

So while Hong Kong's consumer price index has been rising rapidly, the rise has not disturbed real growth or the exchange rate.

Those advising Mexico against depreciation contend that such a move would reflect the notion that there is a "real exchange rate." But finding out what that real rate is depends on arbitrarily choosing a base year to compare the value of the currency over time to determine if the peso is "overvalued" or undervalued."

Hong Kong's rising prices indicates that its citizens are getting rich. Rapidly developing nations will have rising price levels due to increased demand. Therefore, it would be a mistake for Mexico to try to maintain price stability or devalue its currency.

Source: Robert L. Bartley, "Mexico's Money Theorists Need a Tip from Hong Kong," Wall Street Journal, December 20, 1996.


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