Note: This is my homework 1 for the course Economic Forecasting. You’re welcome to put down any comments regarding the topics I discussed or my use of English. Thanks!
Mexico is more directly affected by the U.S. recessions than many other nations. More than 80% of its exports go to the U.S. market. Remittances from migrate workers to the US is Mexico’s second largest source of income after oil imports. In 2009, Mexico experienced the largest decrease in money sent home by migrants as the remittances dropped by nearly 16 percent.See NPR report, http://www.npr.org/templates/story/story.php?storyId=123373874. How, whether the US recessions influence the expenses of living for Mexicans is unclear. In this paper, I try to inspect the relationship between US recessions and Mexico’s Consumer Price Index for all goods.
Mexico’s Consumer Production Index (CPI) for all goods was acquired at Federal Reserve Bank at St. Louis Economic Research website.See http://research.stlouisfed.org/fred2/series/MEXCPIALLMINMEI/.The data were recorded monthly without seasonal adjustment from January 1969 to June 2011, a total of 510 observations. According to Organization for Economic Co-operation and Development, the original source of the data, See http://stats.oecd.org/mei/default.asp?lang=e&subject=8&country=MEX.:
The index measures monthly changes in the general level of prices of goods and services that households acquire for consumption. All consumption expenditure data are classified by Banco de México into 315 generic products. The main criteria used to define the grouping structure of generics are: the basic need which they satisfy, their economic sector of origin and core inflation.
The data of US recession periods were attained from National Bureau of Economic Research website at http://www.nber.org/cycles/. The June 2009 trough was announced September 20, 2010. Recently, however, there are doubts that the US might be undergoing the second wave of recession in light of the continuing weak performance of macroeconomic indicators.See New York Times report, http://www.nytimes.com/2011/08/08/business/a-second-recession-could-be-much-worse-than-the-first.html?pagewanted=all.
3 Summary Statistics
Mexico’s CPI for all goods rose considerably throughout the years. The mean of CPI is 13.80, but it isn’t suggestive because of the strong upward trend, though at varied speeds in different periods. The highest CPI index, 128.10, is 6400 times as the lowest observation, 0.02.
4 The Plot
The follow shows the plot of Mexico’s CPI for all goods with US recession dates. From late 1960s to mid 1980s, Mexico’s CPI stayed constantly low. It experienced some modest growth from the mid 1980s to the early 1990s. From 1995 onwards, Mexico’s CPI soared, but the trend slowed down in the 2000s. However, there doesn’t seem to be a clear pattern between the US recessions and Mexico’s CPI.
4.1 Mexico’s economic dependence on the US
In macroeconomic theory, Y=C+I+G+EX
Y= total GDP
Any change in consumption and net exports will affect the GDP of a country. On the one hand, Mexico depends heavily on the transfer incomes of their citizens working in the US. When the US is undergoing an economic recession, unemployment rate rises and it becomes more difficult for Mexican workers to find a job. Their income is reduced, thus lowering the consumption level of Mexican citizens. On the other hand, US recessions cause the purchasing power of Americans to decrease and they will in turn lower imports from Mexico. The two channels indicate that US recessions should spur a corresponding decease in economic output in Mexico.
Apart from geographical proximity and the corresponding convenience of trade, the North American Free Trade Agreement (NAFTA) has strengthened the Mexico’s dependence upon the US. In the 1980s, Mexico underwent deep proverty, and CPI stayed very low. In the 1990s after NAFTA was set up, Mexico enjoyed greater exports and increased its national income as well as purchasing power.
4.2 Limitation of the data
The Consumer Price Index represents the purchasing power of a currency instead of residents in a particular country. The drastic increase in Mexico’s CPI from 1994 to 2000 was an indicator of the econmic turmoil the country was going through. Due to inconsistent fiscal and monetary policies (Lustig, 1995), the Mexican peso was devalued and this caused a widespread fear among foreign investors. The purchasing power of the currency was greatly reduced, and this is the primary reason for the soaring CPI.
CPI, unlike output measures (GDP, Industrial Production, and so on), is primarily affected by the monetary policies pursued by a country. Therefore the US recessions might not have a great impact on Mexico’s CPI. This is precisely what I observed from the data.
To investigate the impact of US recessions on Mexico’s economy, it might be more helpful to make a comparison between Mexico’s GDP growth rate and US recessions. But since GDP data are recorded on a quarterly basis and data on Mexico is limited, it is not convenient in this context to discuss this problem. Interested readers might conduct their own analysis using properly adjusted data.One possible data source is http://research.stlouisfed.org/fred2/series/MEXGDPRQPSMEI.
Lustig, N. 1995. “The Mexican Peso Crisis: the Foreseeable and the Surprise”. Brookings Institution.
References Mankiw, N. G. 2008. Principles of Macroeconomics, 5th edition. South Western, Canada.