External Shocks and Business Cycle Fluctuations in Mexico: How Important are U.S. Factors?
33 Pages Posted: 1 Jul 2008
Date Written: April 2008
This paper examines the relative importance of external shocks as sources of business cycle fluctuations in Mexico, and identifies the dynamic responses of domestic output to foreign disturbances. Using a VAR model with block exogeneity restrictions, it finds that U.S. shocks explain a large share of Mexico's macroeconomic fluctuations after NAFTA. This partly reflects greater trade integration - but also Mexico's "Great Moderation," as the country escaped its former pattern of macro-financial crises. In this period, Mexico's output fluctuations have been closely synchronized with the U.S. cycle, with a large and rapid impact of U.S. shocks on Mexican growth.
Keywords: Working Paper, Mexico, Business cycles, External shocks, United States, Economic models
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