Mexico’s Finance-Growth Nexus with Trade Openness, FDI and Portfolio Investment: Evidence from VECM Cointegration Analysis
Main Article Content
Keywords
Finance-growth nexus, Globalization, VECM, Cointegration, Mexico
Abstract
This study investigates Mexico’s finance-growth nexus by controlling the “globalization” variables of trade openness, foreign direct investment (FDI) and portfolio investment together with the structural break dummy. Financial development is proxied by two indicators of size and efficiency. Implementing the cointegration and Granger causality tests in the framework of the vector error correction model (VECM), we found that: financial size is negative for economic growth with no feedback; financial efficiency and economic growth are in a negative bilateral relationship; trade openness and portfolio investment are positive for economic growth; and FDI is negative for economic growth and financial efficiency.
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References
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Cameron, M. & Tomlin, B. (2000). The Making of NAFTA. New York: Cornell University Press.
Carré, E. & L’œillet, G. (2018). The literature on the finance-growth nexus in the aftermath of the financial crisis: a review. Comparative Economic Studies, 60 (1), 161-180.
Cevik, S. & Rahmati, M. H. (2018). Searching for the finance-growth nexus in Libya. Empirical Economics, First Online: 31 December, 1-15.
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Cheung, Y. & Lai, K. (1993). Finite-sample sizes of Johansen’s likelihood ratio tests for cointegration. Oxford Bulletin of Economics and Statistics, 55 (3), 313-28.
Chinn, M. D. & Ito, H. (2008). A new measure of financial openness. Journal of Comparative Policy Analysis, 10 (3), 309-322.
Čihák, M., Demirgüç-Kunt, A., Feyen, E. & Levine, R. Financial development in 205 economies, 1960-2010. NBER Working Paper, no. 18946. Cambridge: National Bureau of Economic Research.
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Demetriades, P. O. & Hussein, K. A. (1996). Does financial development cause economic growth?: time-series evidence from 16 Countries. Journal of Development Economics, 51 (2), 387-411.
De Vita, G. & Kyaw, K. S. (2009). Growth effects of FDI and portfolio investment flows to developing countries: a disaggregated analysis by income levels. Applied Economics Letters, 16 (3), 277-283.
Durham, J. B. (2004). Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth. European Economic Review, 48 (2), 285–306.
Elliott, G., Rothenberg, T. J. & Stock, J. H. (1996). Efficient test for an autoregressive unit root. Econometrica, 64 (4), 813-836.
Goldsmith, R. W. (1969). Financial structure and development. New Haven: Yale University Press.
Herman, A & Klemm, A. (2017). Financial deepening in Mexico. IMF Working Paper, no. 17/19. Washington DC: International Monetary Fund.
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12 (2-3), 231-254.
Johansen, S. & Juselius, K. (1992). Some structural hypotheses in a multivariate cointegration analysis of purchasing power parity and uncovered interest parity for the UK. Journal of Econometrics, 53 (1-3), 211–244.
Johansen, S., Mosconi, R. & Nielsen, B. (2000). Cointegration analysis in the presence of structural breaks in the deterministic trend. Econometrics Journal, 3 (2), 216–249.
Kehoe, T. J. & Ruhl, K. J. (2010). Why have economic reforms in Mexico not generated growth? Journal of Economic Literature, 48 (4), 1005-1027.
King, R. G. & Levine, R. (1993a). Finance, entrepreneurship and growth: theory and evidence. Journal of Monetary Economics, 32 (3), 513-542.
King, R. G. & Levine, R. (1993b). Finance and growth: Schumpeter might be right. Quarterly Journal of Economics, 108 (3), 717-737.
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Levine, R. & Zervos, S. (1998). Stock markets, banks and economic growth. American Economic Review 88 (3), 537–558.
Lopez, T. & Basilio, E. (2016). Economic growth and financial development in Mexico: from a virtuous circle of a bidirectional causality to a financial subordination. In Levy, N. & Ortiz, E. (Ed.), The financialization response to economic disequilibria. (pp. 213-230). Cheltenham: Edward Elgar Publishing.
Lucas, R. E. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22 (1), 3-42.
Luintel, K. B. & Khan, M. (1999). A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR. Journal of Development Economics, 60 (2), 381-405.
McKinnon, R. I. (1973). Money and Capital in Economic Development. Washington DC: Brookings Institution.
Moreno-Brid, J. C., Napoles, P. R. & Valdivia, J. C. (2005). NAFTA and the Mexican economy: a look back on a ten-year relationship. North Carolina Journal of International Law and Commercial Regulation, 30 (4), 995-1024.
Nunnenkamp, P. & Spatz, J. (2004). FDI and economic growth in developing economies: how relevant are host-economy and industry characteristics. Transnational Corporations 13 (3), 52-86.
Pagano, M. (1993). Financial markets and growth: an overview. European Economic Review, 37 (2-3), 613-622.
Patrick, H. T. (1969). Financial development and economic growth in underdeveloped countries. Economic Development and Cultural Change, 14 (2), 174-189.
Phillips, P. C. B. & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75 (2), 335–346.
Ramirez, M. D. (2006). Is foreign direct investment beneficial for Mexico?: an empirical analysis, 1960-2001. World Development, 34 (5), 802-817.
Robinson, J. (1952). The Rate of Interest and Other Essays. London: Macmillan.
Sahay, R., Cihak, M., N’Diaye, P., Barajas, A., Bi, R., Ayala, D., Gao, Y., Kyobe, A., Nguyen, L., Saborowski, C., Sviry-dzenka, K. and Yousefi, S. R. (2015). Rethinking financial deepening: stability and growth in emerging markets. IMF Staff Discussion Note, no. 15/08. Washington DC: International Monetary Fund.
Schumpeter, J. A. (1911). The Theory of Economic Development. Oxford: Oxford University Press.
Shaw, E. S. (1973). Financial Deepening in Economic Development. London: Oxford University Press.
Tinoco-Zermeno, M. A., Martınez, F. V. & Torres-Preciado, V. H. (2014). Growth, bank credit, and inflation in Mexico: evidence from an ARDL-bounds testing approach. Latin America Economic Review, 23 (8), 1-22.
Toda, H. Y. & Phillips, P. C. B. (1993). Vector autoregression and causality. Econometrica, 61 (6), 1367–1393.
Yanikkaya, H. (2003). Trade openness and economic growth: a cross-country empirical investigation. Journal of Development Economics, 72 (1), 57– 89.
Wachtel, P. (2011). The evolution of the finance growth nexus. Comparative Economic Studies, 53 (3), 475–488.
Blecker, R. A. (2009). External shocks, structural change, and economic growth in Mexico, 1979-2007. World Development, 37 (7), 1274–1284.
Cameron, M. & Tomlin, B. (2000). The Making of NAFTA. New York: Cornell University Press.
Carré, E. & L’œillet, G. (2018). The literature on the finance-growth nexus in the aftermath of the financial crisis: a review. Comparative Economic Studies, 60 (1), 161-180.
Cevik, S. & Rahmati, M. H. (2018). Searching for the finance-growth nexus in Libya. Empirical Economics, First Online: 31 December, 1-15.
Chandavarkar, A. (1992). Of finance and development: neglected and unsettled questions. World Development, 20 (1), 133–142.
Cheung, Y. & Lai, K. (1993). Finite-sample sizes of Johansen’s likelihood ratio tests for cointegration. Oxford Bulletin of Economics and Statistics, 55 (3), 313-28.
Chinn, M. D. & Ito, H. (2008). A new measure of financial openness. Journal of Comparative Policy Analysis, 10 (3), 309-322.
Čihák, M., Demirgüç-Kunt, A., Feyen, E. & Levine, R. Financial development in 205 economies, 1960-2010. NBER Working Paper, no. 18946. Cambridge: National Bureau of Economic Research.
Cypher, J. M. (2011). Mexico since NAFTA. New Labor Forum, 20 (3), 61-69.
Demetriades, P. O. & Hussein, K. A. (1996). Does financial development cause economic growth?: time-series evidence from 16 Countries. Journal of Development Economics, 51 (2), 387-411.
De Vita, G. & Kyaw, K. S. (2009). Growth effects of FDI and portfolio investment flows to developing countries: a disaggregated analysis by income levels. Applied Economics Letters, 16 (3), 277-283.
Durham, J. B. (2004). Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth. European Economic Review, 48 (2), 285–306.
Elliott, G., Rothenberg, T. J. & Stock, J. H. (1996). Efficient test for an autoregressive unit root. Econometrica, 64 (4), 813-836.
Goldsmith, R. W. (1969). Financial structure and development. New Haven: Yale University Press.
Herman, A & Klemm, A. (2017). Financial deepening in Mexico. IMF Working Paper, no. 17/19. Washington DC: International Monetary Fund.
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12 (2-3), 231-254.
Johansen, S. & Juselius, K. (1992). Some structural hypotheses in a multivariate cointegration analysis of purchasing power parity and uncovered interest parity for the UK. Journal of Econometrics, 53 (1-3), 211–244.
Johansen, S., Mosconi, R. & Nielsen, B. (2000). Cointegration analysis in the presence of structural breaks in the deterministic trend. Econometrics Journal, 3 (2), 216–249.
Kehoe, T. J. & Ruhl, K. J. (2010). Why have economic reforms in Mexico not generated growth? Journal of Economic Literature, 48 (4), 1005-1027.
King, R. G. & Levine, R. (1993a). Finance, entrepreneurship and growth: theory and evidence. Journal of Monetary Economics, 32 (3), 513-542.
King, R. G. & Levine, R. (1993b). Finance and growth: Schumpeter might be right. Quarterly Journal of Economics, 108 (3), 717-737.
Lane, P.R., and G.M. Milesi-Ferretti. 2007. The external wealth of nations mark II: revised and extended estimates of foreign assets and liabilities, 1970–2004. Journal of International Economics, 73 (2), 223–250.
Lee, J. & Strazicich, M. S. (2003). Minimum LM unit root test with two structural breaks. Review of Economics and Statistics, 85 (4), 1082-1089.
Lee, J. & Strazicich, M. S. (2004). Minimum LM unit root test with one structural break. Appalachian State University Working Paper. Boone: Appalachian State University.
Levine, R. & Zervos, S. (1998). Stock markets, banks and economic growth. American Economic Review 88 (3), 537–558.
Lopez, T. & Basilio, E. (2016). Economic growth and financial development in Mexico: from a virtuous circle of a bidirectional causality to a financial subordination. In Levy, N. & Ortiz, E. (Ed.), The financialization response to economic disequilibria. (pp. 213-230). Cheltenham: Edward Elgar Publishing.
Lucas, R. E. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22 (1), 3-42.
Luintel, K. B. & Khan, M. (1999). A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR. Journal of Development Economics, 60 (2), 381-405.
McKinnon, R. I. (1973). Money and Capital in Economic Development. Washington DC: Brookings Institution.
Moreno-Brid, J. C., Napoles, P. R. & Valdivia, J. C. (2005). NAFTA and the Mexican economy: a look back on a ten-year relationship. North Carolina Journal of International Law and Commercial Regulation, 30 (4), 995-1024.
Nunnenkamp, P. & Spatz, J. (2004). FDI and economic growth in developing economies: how relevant are host-economy and industry characteristics. Transnational Corporations 13 (3), 52-86.
Pagano, M. (1993). Financial markets and growth: an overview. European Economic Review, 37 (2-3), 613-622.
Patrick, H. T. (1969). Financial development and economic growth in underdeveloped countries. Economic Development and Cultural Change, 14 (2), 174-189.
Phillips, P. C. B. & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75 (2), 335–346.
Ramirez, M. D. (2006). Is foreign direct investment beneficial for Mexico?: an empirical analysis, 1960-2001. World Development, 34 (5), 802-817.
Robinson, J. (1952). The Rate of Interest and Other Essays. London: Macmillan.
Sahay, R., Cihak, M., N’Diaye, P., Barajas, A., Bi, R., Ayala, D., Gao, Y., Kyobe, A., Nguyen, L., Saborowski, C., Sviry-dzenka, K. and Yousefi, S. R. (2015). Rethinking financial deepening: stability and growth in emerging markets. IMF Staff Discussion Note, no. 15/08. Washington DC: International Monetary Fund.
Schumpeter, J. A. (1911). The Theory of Economic Development. Oxford: Oxford University Press.
Shaw, E. S. (1973). Financial Deepening in Economic Development. London: Oxford University Press.
Tinoco-Zermeno, M. A., Martınez, F. V. & Torres-Preciado, V. H. (2014). Growth, bank credit, and inflation in Mexico: evidence from an ARDL-bounds testing approach. Latin America Economic Review, 23 (8), 1-22.
Toda, H. Y. & Phillips, P. C. B. (1993). Vector autoregression and causality. Econometrica, 61 (6), 1367–1393.
Yanikkaya, H. (2003). Trade openness and economic growth: a cross-country empirical investigation. Journal of Development Economics, 72 (1), 57– 89.
Wachtel, P. (2011). The evolution of the finance growth nexus. Comparative Economic Studies, 53 (3), 475–488.