The Tale of Three Amigos: Remittances, Exchange Rates, and Money Demand in Mexico

The author analyzes the relationship between remittances, exchange rates, and money demand in Mexico. He finds that shocks to remittances have a positive impact on domestic money demand. The results also suggest the existence of a bi‐directional relationship between remittances and the exchange rate. Furthermore, positive shocks to remittances are found to have a negative impact on Mexico's real exchange rate. This indicates that remittances appreciate the Mexican peso and therefore may impact on the competitiveness of the tradable sector negatively.