The Mexican economy: balance-of-payments-constrained growth model--the importance of the exchange rate, 1970-1999

Abstract

We argue that the main constraint for the Mexican economy to grow remains inside the structural deficit of the current account as well as in the real exchange rate level. An annual structural econometric model (1970-99) (estimated through weighted two-stage least squares) is estimated to identify the determinants of the four balances that constitute the current account balance. The main objective is to detect only long-run relationships and, consequently, to analyze the sensibility of the overall system to the exchange rate. By doing this, we enforce the introspective features of Thirlwall's Law through what may be called the "extended exchange rate Thirlwall's Law." A detailed analysis of the joint residuals coming out from the structural estimations are performed in order to demonstrate that all the variables involved in the behavioral equations are cointegrated, since they are all "white noise" and normally distributed.