The main focus of examination of this thesis can be broadly defined as the analysis of the main determinants of economic activity in Mexico. In this analysis, it is found that real and nominal exchange rates have enormous importance in the determination of economic activity in Mexico compared to other candidates. This conclusion is reached through a series of quantitative examinations of Mexican times series of aggregated macro economic variables. First, the determination of long-run real exchange rate is analyzed. Then, an inverse relationship between real exchange rate (defined as Pesos/Dollars) and real output and consumption has been established both empirically and theoretically, using explicit long-run models. Variance decomposition and impulse response analyses, carried out with the help of vector error correction models embedding long-run relations, have revealed the fact that the most important source of fluctuations either in consumption or output is the real exchange rate. The other variables considered in the analysis, such as supply, demand, or monetary shocks have been found to have less or non-robust importance. Next, the thesis examines the business cycle associated with exchange rate based programmes for the case of Mexico. The impulse responses, provided for this analysis, partly confirmed initial-boom-Iater-recession hypothesis observed in exchange-rate-basedstabilization programmes. The variance decomposition analysis, on the other hand, indicates that, the movements either in consumption or output can be largely explained by nominal exchange rate shocks rather than monetary shocks. Finally, given the importance of exchange rate variables, the thesis returns to the question of their determinants. Based on the quantitative analysis performed, the thesis concludes that real exchange rates can be solely explained by real shocks and nominal exchange rates can largely be explained by real shocks. Hence, it is the real exchange rate models that explain real exchange rate movements via the predominance of real shocks that get credit.