FOREIGN CAPITAL FLOWS AND ECONOMIC GROWTH: THE CASE OF MEXICO

CECILIA WINTERS, Fordham University

Abstract

This dissertation investigated econometrically, using three separate models, the direct effects of foreign capital flows on the Mexican economy. The first model separated foreign capital flows between net foreign direct investment and net external borrowing to test their differential impacts on growth. The remainder of the study focused on foreign borrowing and its relationship to the main economic aggregates in Mexico.^ The unique contribution of this research was based upon a revitalization of the two gap model. The theory suggested that separation of foreign borrowing into its unanticipated and anticipated components would lend additional insight into the nature of the foreign exchange constraint in Mexico. This technique further allowed investigation into the dynamic response of various sectors to expected foreign loans, and enabled one to infer whether or not the loans were productively used. The second model used the vector autoregression technique to estimate expected foreign borrowing and its unanticipated counterpart. The third model employed these two foreign capital flow variables in a model of Mexico's domestic economy which included the real exchange rate, private consumption and investment and total government expenditure.^ The results of the first model revealed that foreign investment and foreign borrowing both contribute significantly to growth, but neither makes a larger contribution than the other. This is in view of the fact that the former was a much smaller quantity than the latter during the period of study, 1960-1985.^ The results of the second part of the investigation suggested that unanticipated foreign loans did not exceed the domestic demand for foreign exchange during the period 1965-1985 in Mexico, since the coefficient of this variable was not significantly different from zero in the real exchange rate equation. Unanticipated flows did significantly affect investment and government expenditure. The conclusion follows that these unexpected loans were received as a windfall to the economy. The implication of this result is that Mexico has not borrowed excessively during this period. Anticipated borrowing also had a direct and significant impact on government expenditure. Given that the government is one of the main economic actors in the economy with respect to investment and capital formation, the inference can be drawn that the borrowed foreign exchange has been used productively. ^

Subject Area

Economics

Recommended Citation

WINTERS, CECILIA, "FOREIGN CAPITAL FLOWS AND ECONOMIC GROWTH: THE CASE OF MEXICO" (1987). ETD Collection for Fordham University. AAI8714593.
http://fordham.bepress.com/dissertations/AAI8714593

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