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


  • Carlos A. Ibarra


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.

Suggested Citation

  • Carlos A. Ibarra, 2011. "Capital flows, real exchange rate, and growth constraints in Mexico," International Review of Applied Economics, Taylor & Francis Journals, vol. 25(6), pages 653-668, November.
  • Handle: RePEc:taf:irapec:v:25:y:2011:i:6:p:653-668
    DOI: 10.1080/02692171.2011.557047

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    Cited by:

    1. 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, vol. 25(C), pages 33-47.
    2. Guglielmo Maria Caporale & Faek Menla Ali & Fabio Spagnolo & Nicola Spagnolo, 2015. "International Portfolio Flows and Exchange Rate Volatility for Emerging Markets," CESifo Working Paper Series 5615, CESifo Group Munich.
    3. Carlos A. Ibarra & Robert A. Blecker, 2016. "Structural change, the real exchange rate and the balance of payments in Mexico, 1960–2012," Cambridge Journal of Economics, Oxford University Press, vol. 40(2), pages 507-539.
    4. Thomas Goda & Alejandro Torres, 2013. "Tasa de cambio real y recomposición sectorial en Colombia," DOCUMENTOS DE TRABAJO CIEF 010936, UNIVERSIDAD EAFIT.
    5. Khairul Akmaliah Adham & Hasmiah Kasimin & Nurul Atasha Jamaludin & Siti Khadijah Mohd Ghanie & Nor Azzatunnisak Mohd Khatib & Mohd Fuaad Said, 2016. "Developing a Cybernetics Approach to Analysing Inclusive Growth Constraints," Systemic Practice and Action Research, Springer, vol. 29(3), pages 215-234, June.
    6. Carlos A. Ibarra, 2013. "Capital Flows and Private Investment in Mexico," Economía Mexicana NUEVA ÉPOCA, , vol. 0(3, Cierre), pages 65-99.
    7. repec:wsi:serxxx:v:62:y:2017:i:01:n:s0217590816500168 is not listed on IDEAS

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