Mexican Investment After the Tequila Crisis: Basic Economics, "Confidence" Effects, or Market Imperfections?

Stiglitz, Joseph E.; Lederman, Daniel; Menendez, Ana Maria; Perry, Guillermo

This study provides an empirical investigation of the determinants of the growth of investment in Mexico, especially after the Tequila crisis. The paper uses the Generalized Method of Moments estimator to determine if investment can be explained with a standard investment function. The model predicts well the recovery of investment; the tradable sector has an accelerator effect that exceeds that of the non-tradable sector. Domestic real interest rates and real exchange rate volatility are also significant. Results support the hypothesis of a "confidence" effect during the 1982-1983 crisis, but not during the Tequila crisis. There is also evidence of credit rationing.

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Journal of International Money and Finance

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April 2, 2013