Import elasticities and the external constraint in Mexico

The paper estimates and analyzes an equation for intermediate imports in Mexico during the 1988-2006 post-liberalization period. While some results are obtained from Johansen's VECM model, most of the analysis is carried out within an Error-Correction ARDL framework, following the bounds testing approach of Pesaran et al. (2001). Besides showing that an aggregate equation for intermediate imports can be satisfactorily estimated, the paper focuses on two specific results. First, exports have a very significant effect on imports, and failure to control for this effect (as in most previous studies) can yield misleading results, like an over-estimation of the output elasticity of imports. Second, the response of imports to variations in the real exchange rate has fallen over time, presumably because of the rising share of maquila in Mexico's export basket and the increasing “vertical specialization” of non-maquila export production. Some implications of the estimation results are briefly discussed, making reference to the possible external constraint on Mexico's economic growth.

► Econometric study of the determinants of Mexican intermediate imports during 1988-2006. ► Intermediate imports are strongly and increasingly determined by exports. ► In contrast, they have become less responsive to the real exchange rate. ► Both results have implications for the study of the external constraint on Mexico's economic growth.