How Does the Monetary Model of Exchange Rate Determination Look When It Really Works?

This paper shows that the Mexican experience from 1945 to 2002 is, like the German hyperinflation period, a unique monetary ``natural experiment,'' where fundamental relationships, like money demand, PPP and the monetary model of exchange rate determination can be analyzed with unparalleled clarity. They hold for the whole period and nonoverlapping subsamples. The long span and a conspicuous structural change might be useful in explaining why these theoretical relationships are hard to prove elsewhere. A fascinating switch in the weak exogeneity properties helps to clarify simultaneously the controversies surrounding the exchange rate forecastability and the absence of money in models of inflation