Question

Mexico tends to have much higher inflation than the United States and also much higher interest rates than the United States. Inflation and interest rates are much more volatile in Mexico than in industrialized countries. The value of the Mexican peso is typically more volatile than the currencies of industrialized countries from a U.S. perspective; it has typically depreciated from one year to the next, but the degree of depreciation has varied substantially. The bid/ask spread tends to be wider for the peso than for currencies of industrialized countries.

Identify the most obvious economic reason for the persistent depreciation of the peso.

Answer 1

We know from International Fisher Effect that high inflation countries see depreciation in their currency compared to low inflation countries. In Mexico, peso is depreciating because of the high persistent inflation.