External Shocks and Business Cycle Fluctuations in Mexico: How Important are U.S. Factors?

IMF Working Papers, April 1, 2008

Source details

Canonical URL: External Shocks and Business Cycle Fluctuations in Mexico: How Important are U.S. Factors?

Examines the relative importance of external shocks as sources of business cycle fluctuations in Mexico.
Identifies the dynamic responses of domestic output to foreign disturbances.
Timeframe and focus: period after NAFTA, when Mexico experienced a "Great Moderation" and closer synchronization with the U.S. cycle.

Uses a VAR model with block exogeneity restrictions to isolate the effects of foreign (U.S.) shocks on Mexican macroeconomic variables.

U.S. shocks explain a large share of Mexico's macroeconomic fluctuations after NAFTA.
Mexico's greater trade integration partly accounts for the influence of U.S. shocks.
Mexico's "Great Moderation"—escaping its former pattern of macro-financial crises—also contributes to the stronger role of U.S. factors.
In the post-NAFTA period, Mexico's output fluctuations have been closely synchronized with the U.S. cycle.
U.S. shocks have a large and rapid impact on Mexican growth.