Inquiry on the Transmission of U.S. Aggregate Shocks to Mexico: A SVAR Approach

We study the transmission of U.S. macro shocks to the Mexican economy. We use a SVAR model to identify, using sign and zero restrictions, six aggregate disturbances originated in the U.S., such as changes in economic policy uncertainty, total factor productivity (TFP), aggregate demand, cost-push shocks, and two types of monetary policy shocks. We then document how these foreign shocks propagated to Mexico over the period 2002Q1-2016Q2. We find that U.S. aggregate shocks may explain up to 78% of output fluctuations in Mexico in the long run, and around 60% of core inflation volatility. Further, our results suggest that shocks to U.S. aggregate demand are the more important foreign disturbances affecting Mexican output. In contrast, uncertainty shocks to U.S. economic policy explain little of Mexican output volatility, even if economic activity seemed to respond to this shock in both countries. Our evidence suggests that the economic policy uncertainty shock was mainly absorbed by the nominal exchange rate, explaining around 20% of its fluctuations.