Detecting a Pre-COVID Fall in the Trend Growth of the Mexican Economy: Extended Version
15 Pages Posted: 23 Feb 2022
Date Written: January 31, 2022
Abstract
Mexico grew -0.1% in 2019. That rate is well below the average between 1980 and 2018, which is 2.4%. Our hypothesis is that the Mexican economy suffered a pre-COVIDfall in its trend growth. To validate the hypothesis we proceed as follows: i) analyze the dynamics of some macroeconomic variables in the first year of the current (2018-2024) and the three previous presidential terms; ii) measure the change in the trend in economic activity and estimate the probability of the economy being in a low growth regime (in a statistical sense) using a three-state Markov switching model; iii) estimate a multivariate regime Markov switching model with the growth of five variables. We summarize our findings into two main results: i) there is a common pattern in macro variables in the first year of a new administration. The main distinguishing feature of the current administration is the reversal of the trade balance in 2019; ii) Mexico moved towards a low growth regime at the end of 2018. We propose, without establishing causality, that the source of the fall in trend growth comes from large changes in economic policy in 2018 and 2019. These changes translated into a negative shock to trend growth. We list four alternative hypotheses. We propose a test for theories explaining the change in 2019: to explain simultaneously the fall in growth and the change of sign of the trade balance. Our theory could account for both facts.
Keywords: Mexican economy, trend, growth, potential output, Markov switching model
JEL Classification: C22, C32, E21, E65
Suggested Citation: Suggested Citation