Carlos A. Ibarra

Exporting without growing: Investment, real currency appreciation, and export-led growth in Mexico

Despite two positive developments – the rise of manufactured exports and a prolonged but eventually successful disinflation – Mexico failed to sustain a high rate of economic growth during its free-trade period 1988–2006. The paper argues that the proximate cause of Mexicos growth failure is the low dynamism of investment, which resulted from the high share of maquila (or assembly goods) in manufactured exports and the real appreciation of the peso during disinflation. The argument is supported by two strands of evidence: an aggregate-demand decomposition that measures the contributions of investment and exports to GDP growth, and the estimation by Johansens methodology of two- and three-equation cointegration models that show the effect of manufactured exports and the real exchange rate on total investment.

Capital flows, real exchange rate, and growth constraints in Mexico

Besides its well‐known problem of slow economic growth, Mexico’s recent evolution features both a sharp rise in the import‐intensity of economic activity – which may have tightened an external constraint on growth – and a persistent real appreciation of the peso – which may have created a profitability constraint. Adopting the approach of gap models and growth diagnostics, the paper contrasts the relevance of the external and the profitability constraints in Mexico after trade liberalization in the mid‐1980s. Although the trade deficit was pro‐cyclical, the three recent episodes of GDP growth acceleration were not accompanied by pressures in the foreign exchange market. Moreover, error correction models show that investment was highly responsive to the real exchange rate but largely unresponsive to foreign capital flows. The evidence supports the conclusion that investment was deterred by the low profitability of an uncompetitive real exchange rate, rather than by the external constraint.

Monetary Policy and Real Currency Appreciation: A BEER Model for the Mexican Peso

A notable feature of the Mexican economy since the late 1980s was the persistent real appreciation of the peso. The appreciation – a key development that helps to explain Mexicos slow rate of economic growth – took place despite changes in the exchange-rate regime, yet with an unchanging focus of monetary policy on gradually reducing the inflation rate. Thus, the frequent assumption that only real-side variables (as opposed to monetary ones) have a lasting or ‘long-run’ effect on the real exchange may not suit the recent Mexican case. The paper presents the results of an econometric study of exchange rate determination in Mexico for the period 1990Q1–2006Q4. The study is based on the so-called BEER (Behavioral Equilibrium Exchange Rate) model, which relies on Johansens cointegration methodology and jointly considers real-side and monetary determinants. The estimation results – in the form of two- and three-equation cointegration models – show that, controlling for the influence of real-side determinants, the peso–dollar interest differential had a statistically and economically significant long-run effect on the pesos real exchange rate.

Disinflation and the December 1994 Devaluation in Mexico

This paper discusses the determinants of the Mexican peso devaluation of December 1994. An examination of basic economic data reveals the shortcomings of existing explanations based on either inconsistent macroeconomic policies or self-fulfilling prophecies. We argue in contrast that the devaluation was related to the exhaustion of the disinflationary programme launched in the late 1980s, and that the timing of policy change was critically influenced by a conflict between the inherited disinflationary stance and the economic goals of the administration taking office in December 1994. The analysis suggests that a prolonged period of real currency appreciation before the devaluation was made possible not only by the strong inflationary aversion of the authorities but by a series of positive shocks that reduced the appreciations negative effects.

Investment and the real exchange rate’s profitability channel in Mexico

The paper estimates different versions of an equation for private investment in Mexico during the post-liberalization period 1988–2013, with the aim of studying the operation of the recently discussed real exchange rate’s profitability channel. During this period, the real exchange rate (RER) was broadly positively correlated with the Mexican price/wage ratio and the Mexican/US relative profit margin in the manufacturing sector, particularly so when the RER experienced large fluctuations, before the end of disinflation in the early 2000s. In the estimations, the effect of the profit margin appears to be ‘deeper’, wiping out the effect of the RER when the two variables are included together in the investment equation. From this, the paper argues that the positive effect of the RER on investment, observed in previous studies that omitted the profit margin, reflects indirectly the positive link of the RER with the profit margin, supporting the existence of a profitability channel in Mexico.

Is Latin America Overcoming its Fear of Floating

This paper analyzes the evolution of fear of floating (FOF) and its effect on output in Chile, Colombia and Mexico. It shows that there has been a gradual rise in exchange-rate volatility as the period of floating lengthens in each country. The paper anal

Profitability and capital accumulation in Mexico: a first look at tradables and non-tradables based on KLEMS

ABSTRACT The article uses the KLEMS database to estimate equations for the rate of private, non-residential capital accumulation in manufacturing, whole tradables, and non-tradables in Mexico during the period 1992-1994. It shows the rate of capital accumulation is positively correlated with the profit rate and its components – the profit share, the output/capital ratio and the relative price of capital goods, negatively correlated in the latter case – in the three sectors, but with considerably larger profitability effects in manufacturing and tradables. It also shows that capital accumulation is positively correlated with the real exchange rate in manufacturing and tradables, and negatively (and less strongly) correlated in non-tradables. A real depreciation increases the relative prices and profit rates of the former sectors, shifting accumulation toward them and away from non-tradables, with a positive overall effect on capital accumulation. The estimations – based on the error-correction ARDL bounds testing approach, and supplemented by OLS equations using the lagged values of the explanatory variables – imply that the flat trajectory of capital accumulation in Mexico is explained in part by a downward trend in the profit rate, which resulted from a fall in the output/capital ratio that more than offset an increase in the profit share.

The Behavior of Interest Rate Differentials under Shifting Exchange Rate Regimes: The Experience of Chile, Colombia and Israel

This paper studies the dynamics of the interest rate differential across band and floating exchange rate regimes in Chile, Colombia and Israel, and in a benchmark group composed of Italy, Portugal and Spain. Significant differences in the interest rate-ex