{
  "title": "Mexico'S Currency Risk Premia in 1992-1994: A Closer Look At the Interest Rate Differentials",
  "publication": "IMF Working Papers, April 1, 1996",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/mexico-s-currency-risk-premia-in-1992-1994-a-closer-look-at-the-interest-rate-differentials-2024",
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  "summary": "This paper studies the behavior of interest rate differentials in Mexico during the 1992-94 period. It shows that the currency risk premia is positively related to the share of peso denominated debt in total debt and that the magnitude of this effect is considerable.",
  "sections": [
    {
      "heading": "Summary findings",
      "content": "- The paper studies the behavior of interest rate differentials in Mexico during the 1992-94 period.\n- The currency risk premia is positively related to the share of peso denominated debt in total debt.\n- For every 1 percentage point increase in the ratio of peso denominated debt in total debt, the interest rate differential increases between 20 and 30 basis points.\n- After adjusting the observed interest rate differential for the change in the composition of public debt, the adjusted measure remained at extremely high levels throughout 1994, signalling a low level of confidence in the announced currency band."
    },
    {
      "heading": "Key quantitative results",
      "content": "- \"For every 1 percentage point increase in the ratio of peso denominated debt in total debt, the interest rate differential increases between 20 and 30 basis points.\"\n- The adjusted interest rate differential remained at extremely high levels throughout 1994 (no alternative numeric values provided in the source)."
    },
    {
      "heading": "Method and adjustment",
      "content": "- The observed interest rate differential was adjusted to account for changes in the composition of public debt to better measure the expectation of a devaluation during the period.\n- Contrast between unadjusted interest rate differentials and the adjusted measure highlights the role of debt composition in observed premia."
    },
    {
      "heading": "Implications and interpretation",
      "content": "- The sizable effect of the share of peso-denominated debt on interest rate differentials implies that shifts in public debt composition materially influenced currency risk premia during 1992-94.\n- The persistence of high adjusted premia throughout 1994 signals low confidence in the announced currency band despite movements in the raw interest rate differential."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subjects: Crawling peg, Currencies, Depreciation, Exchange rates, Foreign exchange, Money, National accounts, Return on investment\n- Keywords: Crawling peg, Currencies, currency risk premium, Depreciation, depreciation expectation, exchange rate, Exchange rates, interest rate differential, keeping peso interest rates, Return on investment, risk premium, share of Cetes, WP\n\nSource: Alejandro M. Werner, \"Mexico'S Currency Risk Premia in 1992-1994: A Closer Look At the Interest Rate Differentials\", IMF Working Papers, April 1, 1996.\n\n---\n\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/mexico-s-currency-risk-premia-in-1992-1994-a-closer-look-at-the-interest-rate-differentials-2024"
    }
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    "Authors: Alejandro M. Werner",
    "Published: April 1, 1996",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451846058.001",
    "The paper studies the behavior of interest rate differentials in Mexico during the 1992-94 period.",
    "The currency risk premia is positively related to the share of peso denominated debt in total debt.",
    "For every 1 percentage point increase in the ratio of peso denominated debt in total debt, the interest rate differential increases between 20 and 30 basis points.",
    "After adjusting the observed interest rate differential for the change in the composition of public debt, the adjusted measure remained at extremely high levels throughout 1994, signalling a low level of confidence in the announced currency band.",
    "\"For every 1 percentage point increase in the ratio of peso denominated debt in total debt, the interest rate differential increases between 20 and 30 basis points.\"",
    "The adjusted interest rate differential remained at extremely high levels throughout 1994 (no alternative numeric values provided in the source).",
    "The observed interest rate differential was adjusted to account for changes in the composition of public debt to better measure the expectation of a devaluation during the period.",
    "Contrast between unadjusted interest rate differentials and the adjusted measure highlights the role of debt composition in observed premia.",
    "The sizable effect of the share of peso-denominated debt on interest rate differentials implies that shifts in public debt composition materially influenced currency risk premia during 1992-94.",
    "The persistence of high adjusted premia throughout 1994 signals low confidence in the announced currency band despite movements in the raw interest rate differential.",
    "Subjects: Crawling peg, Currencies, Depreciation, Exchange rates, Foreign exchange, Money, National accounts, Return on investment",
    "Keywords: Crawling peg, Currencies, currency risk premium, Depreciation, depreciation expectation, exchange rate, Exchange rates, interest rate differential, keeping peso interest rates, Return on investment, risk premium, share of Cetes, WP"
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