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Comments by Guy Meredith, Caroline Atkinson, and other colleagues on earlier versions of the paper are gratefully acknowledged. Bruce Culmer provided excellent research assistance.
Mexico was a net importer of oil up until the mid-1970s, when large discoveries turned the country into a significant exporter of oil and other petroleum products.
The assumption of fixed weights of 0.67 for labor and 0.33 for capital is consistent with those of other researchers. See; for example Bosworth (1998), Santaella (1998), World Bank (1998), Loayza, Fajnzylber, and Calderon (2002), Bergoeing et al. (2002), and Blazquez and Santiso (2004). United Nations (1986) estimated the factor share for labor to be 0.42. This does not include, however, compensation of the self-employed.
The national accounts include an estimate of output of the informal sector, but the official “formal sector” employment measure excludes the self-employed, family workers, and jobs in the informal sector. We use the more comprehensive measure—the economically active labor force—in our analysis to try to capture the contribution of workers in the latter categories.
The analysis in this paper did not exclude the sharp contraction in real GDP in 1995 since the subsequent recovery in 1996 equally large, suggesting no permanent output loss, and partly because the financial crisis was endogenous. Abstracting from the effects of the crisis on output in 1995 would, however, cause a higher level deterioration in TFP growth during 1983–88, reflecting the debt crisis, and a smaller but still negative level of TFP for the period 1989–94.
Chile offers an interesting contrast in this respect. For a detailed comparison see Bergeonig et al. (2002).
World Bank (1998) estimates that the informal sector has absorbed over 50 percent of the increase in the total labor force since 1981 (p. 34).
Harvey (1985) and Clark (1987) suggest specificfying ρ=2. Depending on the estimates of the AR(2) processes, z t may have complex roots and thus obey a cyclical process.
See Harvey (1989) and Hamilton (1994) for a discussion of state-space models and the Kalman filter.
It is possible that large output gaps could have lasting effects on the growth rate of potential, but there are no a priori reasons for this to be the case.
In this section, trend GDP is generated using the Kalman Filter. Trend TFP is then derived as the difference between actual and trend GDP.
We assumed the conventional 1,600 smoothing parameter for the quarterly data under the HP filter.
A more complete model incorporating supply-side factors and expectations is analyzed in the next section.
See Chadha, Masson, and Meredith (1992) for a discussion of the rationale for including both forward- and backward-looking components of the inflation process.
This restriction easily passes a Wald test.
In IMF Country Report 04/250, the coefficient on the output gap of 0.13 was insignificant at the 5 percent level. This compares with an estimate of 0.06 in the current study. The latter estimate is significant at the 1 percent level.
In IMF Country Report 04/250, potential output and the output gap were estimated by applying the Hodrick-Prescott filter to the monthly global economic activity index (IGAE) for Mexico obtained from INEGI. The coefficient on the change in the output gap of 0.09, compares with 0.02 in the current study. Both coefficients are significant in explaining inflation at the 1 percent level.