Impact of US policy uncertainty on Mexico: Evidence from linear and nonlinear tests

Abstract

Recent US economic policy uncertainty stemmed from renegotiating NAFTA, increasing tariffs, reforming immigration policy, persuading Mexico to pay for a wall along the southern border, etc. should influence Mexican economic activities as more than 80 % of Mexico’s total export is imported by the US. To understand the extent and nature of the impact of US policy uncertainty on the economic activities of Mexico, we use an indicator of economic policy uncertainty recently developed by Baker et al. (2016) and apply linear and non-linear structural vector autoregression (SVAR) models with US and Mexican macroeconomic aggregates. Our analysis shows that an increase in the US policy uncertainty leads to a fall in Mexican output (industrial production), price level and policy interest rate. In fact, the contribution of the US uncertainty shock to the Mexican output and interest rate is larger than that of the Mexican uncertainty shock. The findings are robust to various identifications of the SVAR model. We also apply the symmetric impulse response test proposed by Kilian and Vigfusson (2011) and find that the responses of Mexican aggregates are symmetric to positive and negative US uncertainty shocks.