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Economic Change and Restructuring

, Volume 49, Issue 4, pp 339–364 | Cite as

Investment, asset market, and the relative unit labor cost in Mexico

  • Carlos A. IbarraEmail author
Article

Abstract

The paper estimates equations for the Mexican/US manufacturing relative unit labor cost (RULC), and finds significant effects from asset market variables like interest rate differentials, foreign reserve accumulation, and international capital flows. The equations are motivated by a simple decomposition that reveals the roles played by relative manufacturing prices and real product wages—and hence the nominal exchange rate—in the upward trend of RULC. The paper follows to estimate equations for aggregate private investment in Mexico, finding a negative RULC effect that agrees with the recent literature on the real exchange rate’s profitability (or development) channel. All the estimations focus on long-run effects, applying the bounds testing approach to quarterly data from 1988 to 2013. The results imply that both the repeated surges in capital inflows and the disinflationary stance of monetary policy in Mexico contributed to the upward trend in RULC, which affected the country’s economic growth negatively by its depressing effect on investment.

Keywords

Relative unit labor cost (RULC) Real exchange rate determinants International capital flows Foreign reserve accumulation Real interest rate differentials Investment determinants Real exchange rate’s profitability channel Bounds testing approach Mexico 

JEL Classification

C22 E22 F21 F32 F43 O11 O54 

Notes

Acknowledgments

The author would like to thank the editor, an anonymous reviewer, Jaime Ros, Mahsa Gholizadeh, and participants in seminars at UNAM, Universidad de Guadalajara, and Banco de México, as well as panels at LACEA and the Eastern Economic Association meetings in Boston and New York for helpful comments on earlier drafts. The usual caveat applies. Financial support from CONACYT (project 154347) is gratefully acknowledged.

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Department of EconomicsUniversidad de las Américas PueblaCholulaMexico

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