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Real exchange rate shocks on tradables, nontradables, and the current account: Mexico, 1980–2000

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  • André Varella Mollick

Abstract

Effects of external and income shocks on consumption and on the current account in Mexico from 1980 to 2000 are investigated. An intertemporal model captures the extent into which non-traded goods consumption affects traded-goods consumption, clarifying the roles of intratemporal or intertemporal substitution. Vector autoregressions (VARs) show that the 1% shock to non-traded goods consumption affects traded-goods consumption by −2% immediately, reverting to zero only after one year, supporting the intratemporal channel. Real exchange rate (RER) shocks exert considerable macroeconomic fluctuations. The 1% shock to RER affects traded goods consumption by −2% immediately, reaching −5% one year later. At the expense of income shocks, RER shocks grow in explanatory power over time: from 20%–25% at 1 quarter to 65%–69% of the variance of traded goods consumption 3 years later. Figures for the current account range from 14% to 68%, while income shocks appear less important. In contrast, for non-traded goods, RER shocks roughly match the quantitative importance of income shocks, reinforcing the theoretical analysis. Copyright Springer-Verlag Berlin Heidelberg 2003

Suggested Citation

  • André Varella Mollick, 2003. "Real exchange rate shocks on tradables, nontradables, and the current account: Mexico, 1980–2000," Empirical Economics, Springer, vol. 28(3), pages 615-638, July.
  • Handle: RePEc:spr:empeco:v:28:y:2003:i:3:p:615-638
    DOI: 10.1007/s001810200151
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    Keywords

    Key words: Real Exchange Rate; Traded Goods; Non-traded goods; Current Account; VAR.; JEL classification system: F15; F33.;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration

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