External Shocks, Structural Change, and Economic Growth in Mexico, 1979-2006

This paper estimates the effects of external constraints on growth and investment in the Mexican economy, and how those effects have changed since the economic liberalization of the 1980s and the formation of NAFTA in 1994. Shocks to net financial inflows, world oil prices, the U.S. growth rate, and the real value of the peso explain most of the fluctuations in Mexico’s annual growth since 1979 (with structural breaks in some of these effects due to liberalization or NAFTA). Both Hausman weak exogeneity tests and simultaneous equations estimates generally support the view that growth drives investment but not the other way around, in the short run. Inflows of foreign direct investment have positive effects on investment, but the coefficients are small and their statistical significance is marginal.