Devaluations and aggregate output fluctuations: a random coefficient regression model for Mexico

The goal of this paper is to investigate whether nominal devaluations had real output growth effects in Mexico and, if so, to assess the significance and duration of such effects. A random coefficient regression model to evaluate the output growth effects of 1976, 1982 and 1986 devaluations using sectoral data from 1970 to 1991 is specified and estimated. The results indicate unambiguous short-term contractionary effects of devaluations on non-agricultural output in Mexico. In addition, it is found that adjustments to imbalances in the external sector invariably came from temporary contractions in the aggregate output rather than significant resource reallocation from the non-tradable sector towards the tradable sector. Several transmission mechanisms that relate nominal exchange rate movements to real output fluctuations are also considered.