The 1989-94 Consumption Boom in Mexico: An Analysis of Cointegration Using Regime Shifts
29 Pages Posted: 30 Apr 2001
Date Written: April 2001
We argue that the consumption boom observed in Mexico between 1989 and 1994 can be accurately identified and evaluated if the model for the cointegration relationship between consumption and income allows regime shifts. Using Markov-switching models, we show that the introduction of the program for stabilization and economic reform at the end of 1987 led to a shift from a regime with a cointegrating vector with unitary income elasticity to another involving an elasticity close to 1.3. Also, we show that the vector with unitary elasticity was re-established when a currency and financial crisis erupted at the beginning of 1995.
Keywords: cointegration, consumption, Markov-switching models, Mexico, Regime-switching models
JEL Classification: C19, C22, C50
Suggested Citation: Suggested Citation