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Investment, asset market, and the relative unit labor cost in Mexico

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  • Carlos A. Ibarra

    () (Universidad de las Américas Puebla)

Abstract

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.

Suggested Citation

  • Carlos A. Ibarra, 2016. "Investment, asset market, and the relative unit labor cost in Mexico," Economic Change and Restructuring, Springer, vol. 49(4), pages 339-364, November.
  • Handle: RePEc:kap:ecopln:v:49:y:2016:i:4:d:10.1007_s10644-015-9175-5
    DOI: 10.1007/s10644-015-9175-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Relative unit labor cost (RULC); Real exchange rate determinants; International capital flows; Foreign reserve accumulation; Real interest rate differentials; Investment determinants; Real exchange rate’s profitability channel; Bounds testing approach; Mexico;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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