Mexico's Business Cycles and Synchronization with the USA in the Post-NAFTA Years

Abstract

A number of papers have investigated the increasing macroeconomic ties between Mexico and the USA. These studies have relied on linear models, however, making their results suspect. Other papers have investigated nonlinearity over the Mexican business cycle, but have not studied the links between the Mexican and US economies. In this paper a Markov-switching model is employed to investigate the changing macroeconomic effect of the USA on Mexico. The findings show that the USA indeed appears to have a much larger impact since the passage of the North Atlantic Free Trade Association (NAFTA) than in previous years. Results also indicate that the level of foreign exchange reserves has much less predictive power for the Mexican economy since NAFTA. This suggests that the greater synchronization with the US business cycle may be more attributable to better macroeconomic management in Mexico than to the closer trade links.