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

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  • Carlos A. Ibarra
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    Abstract

    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.

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    File URL: http://hdl.handle.net/10.1080/02692171.2011.557047
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

    Volume (Year): 25 (2011)
    Issue (Month): 6 (November)
    Pages: 653-668

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    Handle: RePEc:taf:irapec:v:25:y:2011:i:6:p:653-668

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    Cited by:
    1. Robert Blecker, 2014. "Structural Change, the Real Exchange Rate, and the Balance of Payments in Mexico, 1960-2012," Working Papers, American University, Department of Economics 2014-01, American University, Department of Economics.
    2. Blecker, Robert A. & Ibarra, Carlos A., 2013. "Trade liberalization and the balance of payments constraint with intermediate imports: The case of Mexico revisited," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 25(C), pages 33-47.

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