Investment, asset market, and the relative unit labor cost in Mexico
Abstract The paper estimates equations for the Mexican/US manufacturing relative unit labor cost (RULC), and finds significant effects from asset market variables like interest rate differentials, foreign reserve accumulation, and international capital flows. The equations are motivated by a simple decomposition that reveals the roles played by relative manufacturing prices and real product wages—and hence the nominal exchange rate—in the upward trend of RULC. The paper follows to estimate equations for aggregate private investment in Mexico, finding a negative RULC effect that agrees with the recent literature on the real exchange rate’s profitability (or development) channel. All the estimations focus on long-run effects, applying the bounds testing approach to quarterly data from 1988 to 2013. The results imply that both the repeated surges in capital inflows and the disinflationary stance of monetary policy in Mexico contributed to the upward trend in RULC, which affected the country’s economic growth negatively by its depressing effect on investment.
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Volume (Year): 49 (2016)
Issue (Month): 4 (November)
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