External Shocks and Business Cycle Fluctuations in Mexico

This paper examines the relative importance of external shocks as sources of business cycle fluctuations in Mexico, and identifies the dynamic responses of domestic output to foreign disturbances. Using a VAR model with block exogeneity restrictions, it finds that U.S. shocks explain a large share of Mexico''s macroeconomic fluctuations after NAFTA. This partly reflects greater trade integration-but also Mexico''s "Great Moderation," as the country escaped its former pattern of macro-financial crises. In this period, Mexico''s output fluctuations have been closely synchronized with the U.S. cycle, with a large and rapid impact of U.S. shocks on Mexican growth.External shocks;Spillovers;Economic models;business cycle, business cycles, real gdp, gdp growth, idiosyncratic shocks, trade integration, domestic demand, business cycle fluctuations, growth rate, private consumption, export sector, external trade, domestic economy, intermediate goods, pre-nafta, trade channels, terms of trade, gdp growth rate, external financing, business cycle synchronization, sources of business cycle, bilateral trade, trade shocks, industry trade, oil prices, trading partners, trade flows, trading partner, growth accounting, multiplier effects, international trade, bilateral trade flows, vertical specialization, increased trade, open economy, regional trade integration, factor analysis, trade deficit, current account deficit, terms of trade shocks, transmission of shocks, oil revenues, output volatility, regional trade, import demand, oil exporters, trade ? exports