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Princeton University and International Monetary Fund, respectively. The authors are grateful to Dora Iakova, Herman Kamil, Robert Rennhack, Ernesto Revilla, Alberto Torres, Alejandro Werner, and seminar participants at the Central Bank of Mexico, at the Mexican Treasury, and at the IMF for comments and discussions.
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2014 Doing Business Report data available at http://www.doingbusiness.org/data/exploreeconomies/mexico/.
The current pricing mechanism in Mexico contemplates monthly adjustments for industrial users according to the evolution of fuel prices and inflation using weights for each fuel determined by its importance in electricity generation. Under the current scheme, and given that oil derivatives (mostly fuel oil) represent 18.1percent of total generation, an immediate substitution of fuel oil for natural gas (about 71 percent cheaper than fuel oil) would imply, ceteris paribus, a reduction of about 13 percent in electricity prices (0.181*-0.71). The recent decline in oil prices has not altered much this gap.
Changes to article 25 of the constitution created the figure of State Productive Enterprises, a more autonomous legal figure that both PEMEX and the electricity regulatory body (CFE) will adopt.
Changes to article 27 of the constitution open the energy sector (including hydrocarbons and electricity) to private investment.
El Economista, August 21, 2014.
US Industrial production is a stronger predictor of growth in Mexico than headline U.S. growth, in particular of manufacturing growth, given the degree of integration of manufacturing production in both countries.
Blanchard and Gali (2007), Kilian (2009) and Melolinna (2012) use three to six variable VARS that include GDP, unemployment, wages, cost of capital, and oil market variables. Here, we are interested in the effect of relative prices on output, and therefore we do not include aggregate employment or capital accumulation measures.
Blanchard and Gali (2007) find a negative effect of oil prices on output, and a positive effect on wage inflation in the U.S. in the 1970s, though the relationship weakens in the 2000s. This is also observed in other developed economies. Kilian (2009) and Melolinna (2012) decompose demand and supply oil shocks, and conclude the supply shocks have a similar effect on output.