Real and nominal exchange rates for Canada and Mexico Two of the largest trading partners of the United States are Canada and Mexico. The FRED database at the Federal Reserve Bank of St. Louis maintains four series that are useful to us: A Real Broad Effective Exchange rate for Mexico (RBMXBIS); A Real Broad Effective Exchange rate for Canada (RBCABIS); the nominal exchange rate of Mexican pesos per U.S. dollar (DEXMSUS); and the number of Canadian dollars per U.S. dollar (EXCAUS). Download all the series monthly and organize to a spreadsheet where the start period is January 1994.

a. The exchange rate in FRED is defined as the number of Mexican pesos and the number of Canadian dollars per U.S. dollar. Redefine them as the number of U.S. cents per peso and the number of U.S. cents per Canadian dollar. Why did you do that?

b. Make a time series graph of the redefined Mexican-U.S. nominal exchange rate and the broad real exchange rate index, RBMXBIS. Do you see a period where the nominal exchange rate is pegged? When the peg was released, did the peso appreciate or depreciate? Is there a period where the peso is appreciating in nominal terms and depreciating in real terms? What is the recent behavior of the peso? Would an exchange rate peg in 2015 have benefitted the Mexican economy?

c. Make a time series graph of the redefined Canadian-U.S. nominal exchange rate and the broad real exchange rate index, RBCABIS. Estimate the percentage fluctuation in the Canadian-U.S. real exchange rate index from 1994 to 2015. Is there a period where the Canadian dollar was pegged? Explain why the real exchange rate index tracks the nominal exchange rate closely in the Canadian-U.S. case. Would there have been any benefits to pegging the Canadian dollar to the U.S. dollar over this period?