## _wp08100

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---

### I. Introduction and background
- Mexico experienced trade and financial liberalization and integration over the last two decades, including entering NAFTA in 1994.
- Increased integration likely allows faster trend growth but makes the economy more sensitive to external shocks; external spillovers are more relevant for output fluctuations.
- Since the 1994–95 crisis, sound and consistent macroeconomic and financial policies allowed Mexico to avoid severe fluctuations; Mexico has achieved its own “Great Moderation.”
- The share of primary commodities in Mexico’s exports has declined over the past 30 years, potentially reducing the relative importance of terms of trade shocks.
- Total trade between Mexico and the U.S. increased from about US$90 billion in 1993 to approximately US$365 billion in 2007.
- The U.S. is Mexico’s largest trading partner: more than 80 percent of Mexico’s exports are destined to the U.S., and about half of its imports are from the U.S.

### Empirical strategy, model, and data
- Model:
  - VAR model with block exogeneity restrictions (two blocks: foreign variables and domestic variables).
  - External variables assumed completely exogenous to the Mexican domestic economy.
  - Identification via Choleski decomposition with external variables ordered before domestic variables.
  - System estimated using Seemingly Unrelated Regressions (SUR); four lags selected by Akaike Information Criterion (AIC).
- Sample and data treatment:
  - Quarterly data from 1995 (or 1980 for longer-period analysis) through 2007Q4.
  - All variables except the world real interest rate and capital flows are expressed in log levels; model estimated in first differences.
  - Standard unit root tests (augmented Dickey-Fuller) show stationarity in first differences; most cointegration tests suggest no cointegration among variables.
- Variables:
  - External block: oil prices (average of Dated Brent, WTI, and Dubai Fateh, U.S. dollars per barrel), world real interest rates (six-month LIBOR deflated by industrial-country CPI), U.S. industrial production (sa, 2002=100), U.S. real GDP (saar, in billions of chained 2000 dollars), U.S. real imports (saar), U.S. real interest rate (three-month T-bill deflated by U.S. CPI), S&P 500 VIX, U.S. junk bond yields.
  - Domestic block: Mexican GDP (saar, million of 1993 new pesos), real effective exchange rate index (REER), capital inflows (net transfers received plus capital inflows minus accumulation of international reserves minus net payments of interest, dividends, profit remittances, etc.).

### Main empirical results and quantitative findings
- Role of U.S. demand shocks (post-NAFTA period):
  - Shocks to U.S. demand for Mexico’s exports—proxied by U.S. industrial production—account for about 35 percent of Mexican GDP fluctuations.
  - Alternative proxies: U.S. GDP accounts for 33 percent and U.S. total imports account for 31 percent of business cycle fluctuations.
- Other external factors:
  - International financial-condition shocks explain about 20 percent of output fluctuations.
  - Oil price shocks account for only 6 percent of output fluctuations.
- Overall external influence:
  - External shocks account for about 60 percent of output fluctuations in Mexico.
  - Comparable IMF finding for Latin America: external factors explain 57 percent of output fluctuations.
- Impulse response dynamics and “rule of thumb” elasticities:
  - A positive innovation to U.S. industrial production increases Mexican output on impact with effects continuing over six quarters; the largest response occurs one quarter after the shock.
  - Derived rule of thumb: an innovation of 1 percentage point in U.S. industrial production growth is typically accompanied by a change of 0.9 percentage point in Mexican GDP growth one quarter after the shock.
  - A one-standard deviation shock to U.S. industrial production growth equals 0.51 percentage points.
- Table 2 (post-NAFTA, one standard deviation shocks): size of shocks and peak GDP responses (at peak quarter)
  - Oil price: Size of shock 0.1041; Peak quarter GDP response 0.0011
  - World real interest rate: Size of shock 0.4208; Peak quarter GDP response -0.0012
  - U.S. industrial production: Size of shock 0.0051; Peak quarter GDP response 0.0044
  - Capital inflows: Size of shock 209.400; Peak quarter GDP response 0.0010
  - REER: Size of shock 0.0351; Peak quarter GDP response -0.0015
- Additional elasticity and response figures reported:
  - A one percentage point increase in U.S. imports growth increases Mexico’s growth by 0.3 percentage points.
  - Rule-of-thumb elasticities for one standard deviation shocks: U.S. industrial production growth rate shock = 0.66 percentage points; U.S. GDP growth rate shock = 0.44 percentage points; U.S. imports growth rate shock = 1.3 percentage points (also referenced as 1.6 percentage points in another figure).
  - Fragmentary statement: "0.7 percentage points after one quarter" and reported range of rule-of-thumb elasticities between 0.7 and 0.9 across specifications.
- Variance decomposition (post-NAFTA; foreign contributors stabilize by eight quarters):
  - U.S. industrial production is the largest foreign contributor at about 35 percent (post-NAFTA estimate).
  - Selected bivariate VAR variance-decomposition (percent explained by U.S. variable):
    - MEX GDP - US ind. prod.: 4 quarters = 43.7, 8 quarters = 45.5
    - MEX GDP - US GDP: 4 quarters = 41.3, 8 quarters = 42.6
    - MEX GDP - US Imports: 4 quarters = 30.6, 8 quarters = 30.8
    - MEX GDP - US private investment: 4 quarters = 20.4, 8 quarters = 26.6
    - MEX GDP - US private consumption: 4 quarters = 19.6, 8 quarters = 20.1
  - Bivariate VAR variance decomposition for Mexican exports (percent explained by U.S. variable):
    - MEX exports - US ind. prod. durable manufacturing: 4 quarters = 49.7, 8 quarters = 49.4
    - MEX exports - US GDP: 4 quarters = 48.4, 8 quarters = 47.3
    - MEX exports - US Imports: 4 quarters = 39.0, 8 quarters = 39.4

### Timing, sample sensitivity, and comparative perspective
- The key role of U.S. demand shocks is stronger in the post-NAFTA period; when the sample starts in 1980, U.S. influences are substantially smaller.
- Differences arise from greater importance of idiosyncratic shocks pre-NAFTA (including crises) and lesser trade integration with the U.S. before NAFTA.
- Comparative findings:
  - Other IMF work and Osterholm & Zettelmeyer report U.S. GDP explains 16 percent for Latin America (1994–2006) and 31 percent for Mexico (1996–2007) in related analyses.

### Transmission channels and amplification mechanisms
- Trade and production-sharing:
  - U.S. output variables (industrial production and GDP) matter more than U.S. domestic demand indicators, consistent with Mexico exporting intermediate goods used as inputs in U.S. production.
  - Mexico’s exports to the U.S. are roughly one-fourth of Mexican GDP in value; value-added from such exports is significantly smaller due to high import content.
- Services spillovers and internal propagation:
  - Services account for about 65 percent of GDP and are highly correlated with U.S. GDP, industrial production, and total imports.
  - Unrestricted VAR results for services (post-NAFTA):
    - Using U.S. industrial production and Mexican exports (Table 15): U.S. industrial production explains 25.72 (40 quarters) and 26.43 (80 quarters) percent of services output fluctuations; Mexican exports explain 4.58 (10), 14.86 (40), 14.84 (80) percent.
    - Summary: 26 percent of services output fluctuations explained by U.S. industrial production; together with Mexican exports, about 40 percent of services variation.
    - Using U.S. GDP (Table 16): U.S. GDP explains 43.16 (10), 26.50 (40), 28.75 (80) percent; summary—29 percent explained by U.S. GDP; together with Mexican exports, about 40 percent.
    - Using U.S. imports (Table 17): U.S. imports explain 15.92 (10), 31.50 (40), 31.31 (80) percent; textual summary yields combined figures of 31 and 45 percent respectively.
  - Impulse responses: services output expands on impact to a U.S. industrial production shock, with a lasting effect of two years and peak one quarter after the shock.
  - Interpretation: sizable spillovers from the export sector to services and the broader economy imply non-trade channels and multiplier effects amplify U.S. shocks within Mexico.
- Other channels noted:
  - Remittances: more than 10 million Mexican immigrants in the U.S. sent about $23 billion in 2007, equivalent to 2.7 percent of GDP; remittances increased by only 1 percent in 2007, down from an annual rate of more than 15 percent in 2006. The magnitude of the 2007 slowdown—vis-à-vis a scenario where remittances had increased in 2007 at the same rate as in 2006—would equal US$3.3 billion.
  - Short-run remittance shock scenario: a remittance decline equal to 0.35 percent of GDP is considered; if this amount were to translate entirely into reduced domestic demand, the short-run effect on GDP would not be dramatic.
  - FDI: FDI flows from the U.S. accounted for about 60 percent of FDI in Mexico since NAFTA; U.S.-origin FDI tends to be highly procyclical and can amplify synchronization.
  - Banking and financial channel: foreign banks represent about 80 percent of the Mexican banking system, creating another channel for financial spillovers.

### Robustness checks and alternative specifications
- Alternative proxies for U.S. demand (U.S. GDP and U.S. total imports) yield similar results: U.S. GDP accounts for 33 percent and U.S. imports for 31 percent of Mexican business cycle fluctuations.
- Including government consumption in the domestic block does not substantially change results; government consumption has very small relative importance and the response of Mexican output to a shock to public expenditure is not statistically significant.
- Alternative measures of international financial conditions (U.S. real interest rate, VIX, junk bond yields) do not dramatically change the dominant role of U.S. growth.
- Specific variance-decomposition snapshots (post-NAFTA) for Real GDP "own" shocks by horizon:
  - Using U.S. real interest rate (Table 5): Real GDP "own" shocks: 72.96 (4 quarters), 47.56 (40 quarters), 43.51 (80 quarters), 42.32 (120 quarters).
  - Using VIX (Table 6): Real GDP "own" shocks: 64.82 (10), 46.15 (40), 40.36 (80), 39.81 (120).
  - Using junk bond yields (Table 7): Real GDP "own" shocks: 68.27 (10), 39.59 (40), 35.50 (80), 33.39 (120).

### Policy relevance and areas for further research
- Policy relevance:
  - Identifying U.S.-sourced shocks and transmission channels can inform Mexico’s macroeconomic policy responses to external slowdowns and potential U.S. “hard landing” scenarios.
  - “Rule of thumb” elasticities can be used in conditional forecasts to gauge Mexico’s exposure to changes in U.S. growth outlook.
- Further research suggested:
  - Better characterization of non-trade channels and multiplier effects through which U.S. shocks propagate to Mexican services and the broader economy.
  - Quantitative assessment of production networks and the role of intermediate goods in amplifying U.S. shocks.
  - Investigation of the episodes and mechanisms behind greater idiosyncratic volatility in the pre-NAFTA period.

*Source: _wp08100 (IMF working paper excerpt through end-2007 analysis and VAR block-exogeneity methodology).*

### References..............................................................................................................

### _wp08100 - References

### Tables and Figures
- Contains tables numbered 1–17 and figures numbered 1–10 with titles as listed in the source.
- Tables include, among others:
  - Variance Decomposition of Mexican Real Output: Post-NAFTA Period
  - Size of the Shocks and Output Response in Mexico: Post-NAFTA
  - Variance Decomposition of Mexico’s Real Output in Services
  - Mexican GDP and U.S. Variables: Bivariate VARs
  - Cross Correlations of Mexican GDP and U.S. Variables
- Figures include, among others:
  - Response of Real Output to a U.S. Industrial Production Shock
  - Response of Real Output to a U.S. GDP Shock
  - Synchronization Between Mexican GDP and U.S. Variables
  - Response of Real Output in Services to a U.S. Industrial Production Shock

### I. INTRODUCTION
- Mexico experienced trade and financial liberalization and integration over the last two decades, including entering NAFTA in 1994.
- Increased integration with the global economy is likely to allow faster trend growth in Mexico, but integration may also make the economy more sensitive to certain kinds of external shocks, making external spillovers more relevant in explaining output fluctuations.
- Since the 1994–95 crisis, implementation of sound and consistent macroeconomic and financial policies has allowed Mexico to leave behind its past pattern of crises, avoiding the severe fluctuations and losses of output associated with such episodes.
- Mexico has achieved its own “Great Moderation” of the business cycle.
- The importance of shocks related to external trade is likely to have grown over time, at least in relative terms.
- The share of primary commodities in Mexico’s exports has declined over the past 30 years—potentially reducing the relative importance of terms of trade shocks.
- The importance of U.S. cycles in driving output fluctuations in Mexico may have increased with the dramatic expansion of trade between the two countries since the inception of NAFTA.
- Total trade—exports plus imports—between the two countries increased from about US$90 billion in 1993 to approximately US$365 billion in

*Source: _wp08100 - References (PDF).*

### 2007. The U.S. is by far Mexico’s largest trading partner: more than 80 percent of Mexico’s

### 2007. The U.S. is by far Mexico’s largest trading partner: more than 80 percent of Mexico’s exports are destined to the U.S., and about half of its imports are from the U.S.

### Background and key questions
- How significant are external shocks as sources of Mexican business cycle fluctuations?
- Do shocks stemming from the U.S. play a key—or even a predominant—role in driving domestic output fluctuations?
- What is the dynamic response of Mexican GDP to a shock affecting the country that absorbs most of Mexico’s exports?
- What are the main transmission mechanisms through which these shocks are propagated to Mexico?
- The paper aims to identify sources and propagation mechanisms of foreign disturbances to (i) characterize Mexican business cycles, (ii) inform macroeconomic policy design and conduct, and (iii) shed light on regional trade integration effects.

### Empirical strategy
- Model: VAR model with block exogeneity restrictions (two blocks: foreign variables and domestic variables), assuming foreign variables are completely exogenous to the Mexican domestic economy.
- Identification: Choleski decomposition with external variables ordered before domestic variables; block exogeneity ensures domestic variables do not enter external block contemporaneously or with lags.
- Estimation: System estimated using Seemingly Unrelated Regressions (SUR); four lags selected by Akaike Information Criterion (AIC).
- Sample: Quarterly data from 1995 (or 1980 for longer-period analysis) through 2007Q4. All variables except the world real interest rate and capital flows are expressed in log levels; model estimated in first differences.

### Model variables and measurements
- External block includes:
  - Oil prices: average of Dated Brent, WTI, and Dubai Fateh (U.S. dollars per barrel).
  - World real interest rates: computed using six-month LIBOR and CPI inflation of industrial countries.
  - U.S. demand for Mexican exports proxied by: U.S. industrial production (sa, 2002=100), U.S. real GDP (saar, in billions of chained 2000 dollars), and U.S. real imports of goods and services (saar, in billions of chained 2000 dollars).
  - Alternative financial-condition measures: U.S. real interest rate (three-month T-bill deflated by U.S. CPI), S&P 500 VIX, U.S. junk bond yields.
- Domestic block includes:
  - Real output: Mexican GDP (saar, million of 1993 new pesos).
  - Real exchange rate: real effective exchange rate index (REER).
  - Capital inflows: net flow of money from abroad (net transfers received plus capital inflows minus accumulation of international reserves minus net payments of interest, dividends, profit remittances, etc.).

### Main empirical results and quantitative findings
- Role of U.S. demand shocks (post-NAFTA period):
  - Shocks to U.S. demand for Mexico’s exports—proxied by U.S. industrial production—account for about 35 percent of Mexican GDP fluctuations.
  - Results robust to alternative proxies: U.S. GDP accounts for 33 percent and U.S. total imports account for 31 percent of business cycle fluctuations.
- Other external factors:
  - International financial-condition shocks explain about 20 percent of output fluctuations.
  - Oil price shocks account for only 6 percent of output fluctuations.
- Overall external influence:
  - External shocks account for about 60 percent of output fluctuations in Mexico.
  - This is comparable to other IMF findings for Latin America where external factors explain 57 percent of output fluctuations.
- Impulse response dynamics and “rule of thumb” elasticities:
  - A positive innovation to U.S. industrial production increases Mexican output on impact with effects continuing over six quarters; the largest response occurs one quarter after the shock.
  - Derived rule of thumb: an innovation of 1 percentage point in U.S. industrial production growth is typically accompanied by a change of 0.9 percentage point in Mexican GDP growth one quarter after the shock.
  - A one-standard deviation shock to U.S. industrial production growth equals 0.51 percentage points.
- Table 2 (post-NAFTA, one standard deviation shocks): size of shocks and peak GDP responses (at peak quarter)
  - Oil price: Size of shock 0.1041; Peak quarter GDP response 0.0011
  - World real interest rate: Size of shock 0.4208; Peak quarter GDP response -0.0012
  - U.S. industrial production: Size of shock 0.0051; Peak quarter GDP response 0.0044
  - Capital inflows: Size of shock 209.400; Peak quarter GDP response 0.0010
  - REER: Size of shock 0.0351; Peak quarter GDP response -0.0015
- Variance decomposition (post-NAFTA period; percentages stabilize at horizon of eight quarters):
  - Oil price, World real interest rate, US industrial production, Capital inflows, REER, Real GDP own shocks, External shocks, Idiosyncratic shocks — Table format presented in source (preserving the conclusion that US industrial production is the largest foreign contributor at about 35 percent).
- Comparative perspective:
  - U.S. demand shocks explain a larger share of Mexican output volatility than in Latin America overall (IMF and Osterholm & Zettelmeyer results indicating 16 percent for Latin America using U.S. GDP as proxy for 1994–2006; other IMF work finds 31 percent for Mexico over 1996–2007).

### Timing and sample-sensitivity
- The key role of U.S. demand shocks is stronger in the post-NAFTA period. When the sample starts in 1980, the relative importance of U.S. influences is substantially smaller.
- Differences explained by:
  - Greater importance of idiosyncratic shocks in the pre-NAFTA period, including economic and financial crises in Mexico.
  - Lesser degree of trade integration with the U.S. before NAFTA.

### Transmission channels and broader implications
- U.S. output variables (industrial production and GDP) matter more for Mexican output than U.S. domestic demand indicators, likely reflecting that many Mexican exports are intermediate goods used as inputs in U.S. production rather than final goods.
- Mexico’s exports to the U.S. are roughly one-fourth of Mexican GDP (value-added from such exports is significantly smaller due to high import content).
- Effects of U.S. output fluctuations extend beyond direct export channels:
  - Changes in U.S. economic activity are important in driving output fluctuations in Mexico’s services sector, which accounts for more than 65 percent of Mexican GDP.
  - Given small direct trade exposure of services to the U.S., findings suggest important spillovers or multiplier effects from the export sector to the rest of the Mexican economy, and the presence of other non-trade channels transmitting U.S. shocks to Mexico.

### Contributions relative to existing literature
- Novelty and additions:
  - Measures relative importance of different types of external shocks—and compares them to idiosyncratic shocks—within a unified VAR block-exogeneity framework.
  - Emphasizes magnitude of Mexican GDP responses to individual shocks; derives “rule of thumb” elasticities from impulse responses useful for conditional forecasting.
  - Extends post-NAFTA period analysis through end-2007 to assess recent slowdown causes and persistence of previously documented strong U.S.–Mexico relationships.
- Literature context:
  - Builds on studies documenting increased synchronization between Mexico and the U.S. after NAFTA and on models showing amplified transmission via outsourcing and production links.

### Robustness checks and alternative specifications
- Alternative proxies for U.S. demand (U.S. GDP and U.S. total imports) yield similar results: U.S. GDP accounts for 33 percent and U.S. imports for 31 percent of Mexican business cycle fluctuations.
- Including government consumption in the domestic block does not substantially change results:
  - Percentage of Mexican output fluctuations explained by U.S. shocks and the dynamic response of Mexican GDP to a shock to U.S. industrial production remain similar.
  - Government consumption has very small relative importance in explaining Mexican business cycle fluctuations; response of Mexican output to a shock to public expenditure is not statistically significant.
- Estimation details that support robustness:
  - Standard unit root tests (augmented Dickey-Fuller) show stationarity in first differences for all variables.
  - Most cointegration tests suggest no cointegration among variables; model estimated in first differences is appropriate.

### Policy relevance and questions for further research
- Policy relevance:
  - Identification of U.S.-sourced shocks and transmission channels can inform Mexico’s macroeconomic policy responses to external slowdowns and potential U.S. “hard landing” scenarios.
  - “Rule of thumb” elasticities can be used in conditional forecasts to gauge Mexico’s exposure to changes in U.S. growth outlook.
- Areas for further research noted:
  - Better characterization of non-trade channels and multiplier effects through which U.S. shocks propagate to Mexican services and the broader economy.
  - Exploration of the role of production networks and intermediate goods in amplifying U.S. shocks.
  - Investigation of episodes and mechanisms behind greater idiosyncratic volatility in the pre-NAFTA period.

*Source: IMF staff paper excerpt (content through end-2007 analysis and VAR block-exogeneity methodology).*

### 1.3 percentage points in the case of U.S. imports.

### _wp08100 - 1.3 percentage points in the case of U.S. imports.

### Key finding excerpt
- "1.3 percentage points in the case of U.S. imports."

### Figure summary
- Figure title: "Figure 1. Response of Real Output to a U.S. Industrial Production Shock 1/"
- Vertical axis values (as printed): -0.003, -0.002, -0.001, 0, 0.001, 0.002, 0.003, 0.004, 0.005, 0.006, 0.007, 0.008
- Horizontal axis markers (as printed): 0 1 2 3 4 5 6 7 8 9
- Footnote: "1/ Response to one standard deviation shock to U.S. industrial production growth rate (0.51 percentage points)  +- 2 s.e."

### Quantitative note
- "point increase in U.S. GDP growth leads to an increase in Mexican GDP growth of" (fragment present in source; no numeric completion provided)

*Source: _wp08100 - 1.3 percentage points in the case of U.S. imports.*

### 0.7 percentage points after one quarter. A one percentage point increase in U.S. imports

### _wp08100 - 0.7 percentage points after one quarter. A one percentage point increase in U.S. imports

### Key quantitative elasticities and responses
- A one percentage point increase in U.S. imports growth increases Mexico’s growth by 0.3 percentage points.
- The response of Mexican output to a one standard deviation shock to U.S. GDP growth (0.4 percentage points) displays "rule of thumb" elasticities ranging from 0.7 to 0.9 across alternative specifications, implying a positive innovation in U.S. growth is passed on to Mexico almost one-for-one.
- Response magnitudes cited for one standard deviation shocks:
  - U.S. industrial production growth rate shock = 0.66 percentage points.
  - U.S. GDP growth rate shock = 0.44 percentage points.
  - U.S. imports growth rate shock = 1.3 percentage points (Figure 3) and also referenced as 1.6 percentage points (Figure 10).

### Variance decomposition results — multivariate VARs (post-NAFTA period)
- U.S. demand and external factors explain substantial fractions of Mexican real GDP fluctuations in post-NAFTA estimates (selected entries from Tables 3–7):
  - Using U.S. GDP as proxy for U.S. demand (Table 3 / related discussion): U.S. growth explains a large fraction; idiosyncratic shocks remain important but smaller than in pre-NAFTA period.
  - Alternative proxies for international financial conditions (U.S. real interest rate, VIX volatility index, junk bond yields) do not dramatically change the role of external factors; U.S. growth remains the dominant external explanator.
- Specific variance-decomposition snapshots (post-NAFTA, selected horizons):
  - Table 5 (using U.S. real interest rate): Real GDP "own" shocks: 72.96 (4 quarters), 47.56 (40 quarters), 43.51 (80 quarters), 42.32 (120 quarters) — proportions shown in the "Real GDP 1/" column for each horizon.
  - Table 6 (using VIX): Real GDP "own" shocks: 64.82 (10), 46.15 (40), 40.36 (80), 39.81 (120).
  - Table 7 (using junk bond yields): Real GDP "own" shocks: 68.27 (10), 39.59 (40), 35.50 (80), 33.39 (120).

### Bivariate VARs and synchronization (post-NAFTA period)
- Bivariate VAR variance decomposition (Table 10 — percent explained by U.S. variable):
  - MEX GDP - US ind. prod.: 4 quarters = 43.7, 8 quarters = 45.5
  - MEX GDP - US IP durable manufacturing: 4 quarters = 42.6, 8 quarters = 45.4
  - MEX GDP - US GDP: 4 quarters = 41.3, 8 quarters = 42.6
  - MEX GDP - US Imports: 4 quarters = 30.6, 8 quarters = 30.8
  - MEX GDP - US private investment: 4 quarters = 20.4, 8 quarters = 26.6
  - MEX GDP - US private consumption: 4 quarters = 19.6, 8 quarters = 20.1
  - Additional entries show lower shares for auto-related and input imports (e.g., 11.2 and 12.6 for "US imports, ind. supplies and materials").
- Bivariate VAR variance decomposition for Mexican exports (Table 11 — percent explained by U.S. variable):
  - MEX exports - US IP durable manufacturing: 4 quarters = 49.7, 8 quarters = 49.4
  - MEX exports - US GDP: 4 quarters = 48.4, 8 quarters = 47.3
  - MEX exports - US ind. prod.: 4 quarters = 41.4, 8 quarters = 42.1
  - MEX exports - US Imports: 4 quarters = 39.0, 8 quarters = 39.4
  - MEX exports - US private investment: 4 quarters = 34.6, 8 quarters = 34.2
- Cross-correlation highlights (Table 12 and Table 13):
  - Peak contemporaneous correlations with Mexican GDP (bolded peak quarter coefficients): Industrial production = 0.85 (peak), I.P. durable manuf. = 0.84, Total imports = 0.81, GDP = 0.79.
  - For Mexican exports, peak contemporaneous correlations: I.P. durable manuf. = 0.81, GDP = 0.80, Total imports = 0.82.

### Services sector: spillovers and transmission within Mexico
- Services sector share and comovement:
  - Services account for about 65 percent of GDP in Mexico and are highly correlated with U.S. GDP, industrial production, and total imports (Figure 7 and Table 14).
- Unrestricted VAR results explaining Mexican services output (post-NAFTA):
  - Using U.S. industrial production and Mexican exports (Table 15):
    - U.S. industrial production explains 25.72 (40 quarters) and 26.43 (80 quarters) percent of services output fluctuations.
    - Mexican exports explain 4.58 (10 quarters), 14.86 (40 quarters), 14.84 (80 quarters) percent.
    - Real GDP (services) "own" shocks: 90.15 (10), 59.41 (40), 58.73 (80).
    - Summary statement: 26 percent of output fluctuations in the services sector is explained by innovations in U.S. industrial production; together, U.S. industrial production and Mexican exports account for about 40 percent of variation in services output.
  - Using U.S. GDP (Table 16):
    - U.S. GDP explains 43.16 (10), 26.50 (40), 28.75 (80) percent (Table format).
    - Variance-decomposition summary: 29 percent of services output fluctuations explained by U.S. GDP; together with Mexican exports, about 40 percent.
  - Using U.S. imports (Table 17):
    - U.S. imports explain 15.92 (10), 31.50 (40), 31.31 (80) percent.
    - Variance-decomposition summary: specification using U.S. imports yields 31 and 45 percent respectively in combined metrics (textual statement: "The corresponding numbers in the specification using U.S. imports are 31 and 45 percent respectively").
- Impulse responses:
  - Services output expands on impact to a U.S. industrial production shock, with a lasting effect of two years and peak one quarter after the shock (Figure 8).
  - Dynamic responses to U.S. GDP and U.S. imports shocks are shown in Figures 9 and 10 (peak and persistence consistent with VAR decompositions above).

### Interpretation of channels and amplification mechanisms
- Trade structure and production-sharing:
  - U.S. output variables (industrial production and GDP) are more relevant for Mexican output than pure U.S. demand indicators, likely because a large share of Mexico’s exports are intermediate goods used as inputs in U.S. production (intra-industry trade, production sharing).
  - Literature cited (summarized findings): maquiladora "outsourcing" industries in Mexico experience fluctuations in value added roughly twice those of corresponding U.S. industries; models explain how U.S. domestic demand shocks are transmitted and amplified in Mexican outsourcing industries.
- Spillovers from exports to services and broader economy:
  - Estimated sizable spillovers: U.S. industrial production and Mexican exports jointly explain about 40 percent of services output variance, indicating amplifying channels from export sector to services and the rest of the economy.
  - Subcomponents of services most influenced by U.S. developments: "Trade, restaurants, and hotels," and "Transport, storage and communication." Least affected: "Finance, insurance, real estate, and business services."

### Other potential transmission channels (briefly noted)
- Remittances:
  - More than 10 million Mexican immigrants reside in the U.S., who sent about $23 billion in 2007, equivalent to 2.7 percent of GDP.
  - Remittances increased by only 1 percent in 2007, down from an annual rate of more than 15 percent in 2006.
  - The magnitude of the 2007 slowdown—vis-à-vis a scenario where remittances had increased in 2007 at the same rate as in 2006—would equal US$3.3 billion.

*Italic source: IMF working paper content provided in the supplied PDF excerpt.*

### 0.35 percent of GDP. If this amount were to translate entirely into reduced domestic demand

### _wp08100 - 0.35 percent of GDP. If this amount were to translate entirely into reduced domestic demand

### Short-run effect of a 0.35 percent of GDP remittance shock
- The paper considers a scenario of a remittance decline equal to 0.35 percent of GDP.
- If this amount were to translate entirely into reduced domestic demand (i.e., making an extreme assumption that all remittances are spent fairly soon after they are received), the short-run effect on GDP would not be dramatic, though it could be non-negligible.

### Foreign direct investment (FDI) channel
- FDI flows from the U.S. accounted for about 60 percent of FDI in Mexico since the inception of NAFTA.
- Literature cited (Calvo, Fernandez Arias, Reinhart, and Talvi (2001)) finds FDI flows from the U.S. to Latin America have been highly procyclical, contracting during downturns in the U.S. economy and increasing during expansions.
- Procyclical U.S.-origin FDI can increase synchronization of business cycles between the U.S. and Mexico and act as a propagation mechanism of U.S. shocks to Mexico.

### Banking and financial channel
- Foreign banks represent about 80 percent of the Mexican banking system.
- The large presence of U.S. and other international banks creates a channel through which changes in financial conditions in the U.S. or other mature markets could influence financial and real developments in Mexico.

### Main empirical conclusions on U.S.–Mexico macro linkages
- Shocks to U.S. real variables—such as U.S. industrial production—explain a large share of fluctuations in Mexico’s output and exports, constituting the largest foreign source of macroeconomic fluctuations in Mexico.
- The relative importance of U.S. influences has been higher in the post-NAFTA period, reflecting greater trade integration and Mexico’s own “Great Moderation.”
- In the last decade (as discussed in the paper), Mexico’s output fluctuations have been of the “normal business cycle” variety and closely synchronized with those of the U.S.
- The overall impact of a U.S. growth shock on Mexican growth seems to be large, “almost one-for-one,” as a rough rule of thumb.
- The most important U.S. variables for Mexico relate to U.S. output—U.S. industrial production or simply U.S. GDP—rather than to U.S. domestic demand. This likely reflects that Mexico’s exports are inputs to U.S. production rather than final domestic demand.

### Spillovers and amplification within Mexico
- Even services—a sector not so directly dependent on foreign markets—seem to be influenced by developments in the U.S. economy.
- This suggests important spillovers or amplifier effects from the export sector to the rest of the Mexican economy.

### Areas for further research (as identified in the paper)
- A deeper understanding of the identified spillover effects from the export sector to the rest of the economy in Mexico.
- A quantitative assessment of other potential channels of transmission of shocks stemming from the U.S., including but not limited to remittances, FDI, and banking linkages.

*Source: IMF working paper content provided in the supplied PDF excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08100.pdf_