Asymmetric real-exchange-rate effects on capital accumulation: Evidence from non-linear ARDL models for Mexico

The paper studies the effects of the real exchange rate (RER) on capital accumulation in Mexico in the period since the late 1980s. By testing for the existence of potential asymmetries, the paper seeks to clarify some of the controversies surrounding the subject. It shows the RER's long-run effects to be qualitatively symmetric but quantitatively asymmetric; thus, while appreciations slow accumulation, depreciations accelerate it, but to a lesser degree. Depreciations, moreover, have dynamically asymmetric effects, expansionary in the long run but contractionary in the short run. The effects are derived from non-linear autoregressive distributed lag models for the private capital accumulation rate in the manufacturing, tradables, and non-tradables sectors, and for the aggregate level of private fixed investment. The results help to reconcile the contradictory conclusions reached by previous studies of Mexico, and to clarify the potential role of the real exchange rate as either barrier or engine of growth.