Asymmetric real-exchange-rate effects on capital accumulation: evidence from non-linear ARDL models for Mexico

Abstract

According to recent development studies, a depreciated real-exchange-rate (RER) level can increase the rate of economic growth, particularly so in developing countries and in the medium run. But although many studies have supported this proposition, others have questioned it: a depreciated RER may facilitate but not ensure faster growth; or appreciations may hurt growth while depreciations play a more neutral role; or both appreciations and depreciations relative to an equilibrium level may in fact decelerate growth.Mexico, with its history of wide RER fluctuations and protracted appreciation trends, has not been immune to these controversies. But while different studies have reached contradictory results, none has tried to establish why this is so. The possible role of asymmetries, in particular, has not been properly studied. While there may be some consensus around the negative growth effects of appreciations, for example, the possibility of positive effects from depreciations remains more controversial. AbstractThe paper studies the effects of the real exchange rate (RER) on capital accumulation in Mexico in the period since the late 1980s. By testing for the existence of potential asymmetries, the paper seeks to clarify some of the controversies surrounding the subject. It shows the RER's long-run effects to be qualitatively symmetric but quantitatively asymmetric; thus, while appreciations slow accumulation, depreciations accelerate it, but to a lesser degree. Depreciations, moreover, have dynamically asymmetric effects, expansionary in the long run but contractionary in the short run. The effects are derived from non-linear autoregressive distributed lag models for the private capital accumulation rate in the manufacturing, tradables, and non-tradables sectors, and for the aggregate level of private fixed investment. The results help to reconcile the contradictory conclusions reached by previous studies of Mexico, and to clarify the potential role of the real exchange rate as either barrier or engine of growth. which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.

How important is the real exchange rate for exports and growth?

“…11. Other studies have found positive effects of RER undervaluation specifically on manufacturing investment (for example, Ibarra (2018) for Mexico and Marconi et al (2022) for Brazil), and one study has found a positive effect on manufacturing output (Nalín/Moreno-Brid 2022). These results suggest that RER depreciation can influence structural change in favor of the manufacturing sector, which can contribute to long-run growth.…”

“…On the one hand, the marginal propensity to save out of profits is typically higher than out of profits for well-known reasons. On the other hand, raising profitability tends to encourage investment (and attracts foreign direct investment) in tradable goods industries (Ibarra 2018; Ibarra/Ros 2019), thereby expanding export capacity and potentially diminishing the need for imports (unless the exports are highly intensive in imported capital and intermediate goods).…”