The Mexican peso began falling well before Donald Trump came on the scene. Opinion varies on Trump’s responsibility for the fall between April and November 2016 (Kevin Drum and Boz make good cases that he did not) but his administration is pretty clearly responsible for the gyrations after Election Day.
Let’s grant that the peso’s fall from 7.4¢ in November 2014 to 5.4¢ in November 2016 had nothing to do with the U.S. election. Was it a bad thing for Mexico?
Well, let’s start with inflation. Did the fall ignite inflation?
Wait, what? Let’s close in on that:
Inflation fell during most of the depreciation. It only started to rebound around the time of the U.S. election. I suppose it is possible that there is some model here where inflation is somehow stored up and then rebounds, but absent a big rise in inventories I do not see the mechanism.
Maybe the reason inflation fell was that the central bank tightened in the face of the depreciation? Let’s then look at interest rates:
The story is similar. Interest rates stay low through most of the depreciation. They only start rising in 2016. The central bank seems remarkably unworried by the fall until the latter half of 2016 ... which (perhaps coincidentally) is around the time that Donald Trump’s role in the depreciation becomes a point of contention.
What about consumer confidence? Did the peso fall sap the animal spirits of Mexican consumers? Maybe the central bank did not need to raise interest rates because Mexican consumers refused to spend.
Huh. Not a whole lot there until Trump’s election.
Finally, we’ll take a look at real wages, as a proxy for the labor market:
In short, 2015 was not a bad year at all, and 2016 was not much worse.
Some people have reported big price hikes in Mexico in 2016, but I am skeptical. Imaginary inflation has been seen all over the world — not least around the time of the adoption of the euro. And I have been travelling to Mexico pretty extensively over the period without noting big nominal hikes, save public transportation ... which is a pretty salient price and could easily cause people to feel that there is inflation going on when there is not.
Either way, I submit to you: the depreciation of the Mexican peso has been a good thing for Mexico. It helped exports and cushioned the fall in oil prices to no discernible economic harm.
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