Summary: This article examines changes in the exchange rate expectations associated with capital controls and banking regulations in a group of emerging countries that implemented these measures to control the adverse effects of sudden capital flows on their currencies. The evidence suggests that for most countries the effects of this type of policies are limited. Moreover, in some cases they appear to have an opposite effect from the one intended. In particular, for some currencies our results suggest there were changes in the extremes of their exchange rate distributions, which make their tails heavier and signal that the market allocates a greater probability to extreme movements. In the same way, evidence is found that this type of measures increases the levels of currency risk premium.

Author(s): Abarca Gustavo; Ramírez Claudia; Rangel José Gonzalo     

Summary: We examine two approaches characterized by different tail features to extract market expectations on the Mexican peso-US dollar exchange rate. Expectations are gauged by risk-neutral densities. The methods used to estimate these densities are the Volatility Function Technique (VFT) and the Generalized Extreme Value (GEV) approach. We compare these methods in the context of monetary policy announcements in Mexico and the US. Once the surprise component of the announcements is considered, our results indicate that, although both VFT and GEV suggest similar dynamics at the center of the distribution, these two methods show significantly different patterns in the tails. Our empirical evidence shows that the GEV model captures better the extreme values.

Author(s): Abarca Gustavo; Rangel José Gonzalo; Benavides Guillermo     

External publications: Journal of Derivatives, Vol. 19, No. 4, pp. 70-90.

Summary: We are interested in forecasting bankruptcies in a probabilistic way. Specifically, we compare the classification performance of several statistical and machine-learning techniques, namely discriminant analysis (Altman's Z-score), logistic regression, least-squares support vector machines and different instances of Gaussian processes (GP's) -that is GP's classifiers, Bayesian Fisher discriminant and Warped GP's. Our contribution to the field of computational finance is to introduce GP's as a potentially competitive probabilistic framework for bankruptcy prediction. Data from the repository of information of the US Federal Deposit Insurance Corporation is used to test the predictions.

Author(s): Peña Tonatiuh; Martínez Serafín; Abudu Bolanle     

External publications: Computational Methods in Economic Dynamics, Vol. 13, Part. 1, pp. 109-131.

Summary: A stumbling block in the modelling of competitive markets with commodity and price spaces of infinite dimensions, arises from having positive cones with an empty interior. This issue precludes the use of tools of differential analysis, ranging from the definition of a derivative, to the use of more sophisticated results needed to understand determinacy of equilibria and, more generally, the structure of the equilibrium set. To overcome these issues, this paper extends the Preimage Theorem and the Sard-Smale Theorem to maps between spaces that may have an empty interior.

Author(s): Accinelli Elvio; Covarrubias Enrique     

Summary: While typically socioeconomically disadvantaged, Mexican migrants in the United States tend to have better health outcomes than non-Hispanic Whites. This phenomenon is known as the Hispanic Health Paradox. Using data from Mexico and the United States, we examine several health outcomes for non-Hispanic Whites and Mexicans in the United States and in Mexico and employ Blinder-Oaxaca decompositions to help explain the paradox. We find evidence that selectivity is playing a significant role in the relatively healthy status of Mexican migrants in the United States. More importantly, there is evidence that health selectivity is a complex process and its effects typically do not work the same way for different health conditions and across genders. We also find evidence that some of migrants' health advantages are lost as they spend more time in the United States.

Author(s): Aguayo Téllez Ernesto; Martínez José N.; Rangel González Erick     

Summary: This document studies the recent evolution of the break-even-inflation implicit in the yields of long-term financial instruments in Mexico. In particular, it analyzes the dynamics of its main components: the long-run inflation expectation and the inflationary risk premium, which are estimated by means of an affine term structure model of interest rates. The results show that the gradual reduction registered in such compensation in the last years is the result of the decrease showed by both components. This reflects, on the one hand, the progressive convergence of the estimated inflation expectation to Banco de México's inflation target as well as its anchoring and, on the other hand, that nominal-bond holders have required a lower hedging against future inflation, possibly, as a reflection of a lower risk perception associated to it.

Author(s): Aguilar-Argaez Ana María; Elizondo Rocío; Roldán-Peña Jessica     

Summary: In order to create an environment of low and stable inflation in Mexico it has been necessary to generate a framework for the conduction of monetary policy focused on price stability along with fiscal discipline. This paper describes some structural achievements to control inflation that have been attained in Mexico. In addition, it shows empirical evidence in favor of the anchoring of inflation expectations, particularly those for the medium and long term, being recently strengthened. Considering three episodes, within the period 2004-2012, in which inflation was subject to different supply shocks, it finds that during the episode in 2012 inflation expectations showed greater stability. Results show that the response from inflation expectations to supply shocks has diminished over time, up to values that are not significantly different from zero. This suggests a strengthening of the credibility of the Bank of Mexico's commitment to price stability.

Author(s): Aguilar-Argaez Ana María; Cuadra Gabriel; Ramírez Claudia; Sámano Daniel     

Summary: We compare the experience of Latin American external debt crises, in particular the one in the 80s, with the current European one. We do so with the aim of shedding some light on the needed adjustment mechanisms. We argue for the need of much larger debt relief in Europe. To address the moral hazard problems that would arise, we propose providing such relief conditional on the reduction of both the fiscal and the current account deficits to zero as a commitment signal.

Author(s): Ramos Francia Manuel; Aguilar-Argaez Ana María; García-Verdú Santiago; Cuadra Gabriel     

Summary: We study experimentally the protection of property in five widely distinct countries-Austria, Mexico, Mongolia, South Korea and the United States. Our main results are the correlations between experimental choices with indicators regarding the security of property, trust and the quality of government. We show that subjects from countries with: (1) higher levels of trust or perceptions of safety are more prone to abstain from plundering and devote less resources to protect their property; and (2) high-quality political institutions support collective protection of property through taxation more often. Our results highlight the relevance of socio-political factors in determining countries' success in addressing collective action problems including safeguarding property rights.

Author(s): Campos-Ortiz Francisco; Putterman Louis; Ahn T. K.; Balafoutas Loukas; Batsaikhan Mongoljin; Sutter Matthias     

Summary: We consider combinations of subjective survey forecasts and model-based forecasts from linear and non-linear univariate specifications as well as multivariate factora-augmented models. Empirical results suggest that a simple equal-weighted average of survey forecasts outperform the best model-based forecasts for a majority of macroeconomic variables and forecast horizons. Additional improvements can in some cases be gained by using a simple equal-weighted average of survey and model-based forecasts. We also provide an analysis of the importance of model instability for explaining gains from forecast combination. Analytical and simulation results uncover break scenarios where forecast combinations outperform the best individual forecasting model.

Author(s): Aiolfi Marco; Capistrán Carlos; Timmermann Allan     

External publications: Forthcoming in Oxford Handbook of Economic Forecasting, M. P. Clements and D. F. Hendry (eds.), Oxford University Press.

Summary: The Mexican economy experienced a shortage of natural gas from the second quarter of 2012 through the second half of 2013. In order to deal with this problem, the state-owned national supplier of natural gas (Pemex) implemented a system that restricts the amount of natural gas used by the manufacturing sector. With this information, we have constructed a "shortage index" that represents the percentage of natural gas restricted per month in each region. We quantify the effect of natural gas shortages on the manufacturing sector and the GDP using a panel data model with state and time fixed effects. We estimate that the natural gas shortage reduced the Mexican GDP annual growth rate by 0.28 percentage points in the second quarter of 2013.

Author(s): Alcaraz Carlo; Villalvazo Martin Sergio     

Summary: In developing countries, some workers have formal jobs while others are occupied in informal positions. One view regarding this duality suggests that sectors are segmented, which means that a worker in the informal sector identical to another in the formal sector cannot get a formal position due to entry barriers. A second view states that workers self-select into informal jobs. Previous research suggests that these two situations may coexist in the same labor market. In this paper we identify the proportion of informal workers who are in each situation for the case of Mexico. Using a simple model of self-selection with entry barriers into the formal sector, we estimate that between 10 and 20 percent of informal workers would prefer to have a formal job. While this result provides evidence of the presence of some segmentation in the Mexican labor market, it suggests that an important proportion of workers in the informal sector self-select into it.

Author(s): Alcaraz Carlo; Chiquiar Daniel; Salcedo Alejandrina     

Summary: In this paper we study the causal effect of a large expansion of publicly provided health insurance on children's academic performance using the case of Mexico. In general, access to free health insurance could improve education outcomes directly by making household members healthier or indirectly by raising the amount of resources available for education expenses. Using a panel of municipalities from 2007 to 2009, we find that the expansion of the Mexican public health insurance program, Seguro Popular, had a positive, statistically significant effect on standardized test scores of primary school children.

Author(s): Alcaraz Carlo; Chiquiar Daniel; Orraca María José; Salcedo Alejandrina     

Summary: This paper studies the effects of remittances from the U.S. on child labor and school attendance in recipient Mexican households. We identify these effects using the impact of the 2008-2009 U.S. recession on remittance receipts. The methodology employed is a differences-in-differences strategy that compares households that were remittance recipients before the crisis with never-recipient households. To avoid possible selection problems, we instrument for membership in the remittance recipient group. We find that the negative shock on remittance receipts caused a significant increase in child labor and a significant reduction of school attendance.

Author(s): Alcaraz Carlo; Chiquiar Daniel; Salcedo Alejandrina     

External publications: Journal of Development Economics, Vol. 97, pp. 156-165.

Summary: We estimate wage differentials across different sectors of the Mexican economy. The results suggest that the wage differential between the formal and informal sectors is significant and larger than the differential between industry and services. The findings suggest that significant differences in productivity levels between the formal and informal sectors could exist. This, in turn, might imply that the economy's aggregate productivity could be affected by the increase of the share of informal employment. The results also suggest that the main distortions in the Mexican labor market seem to be related more with labor regulations that affect the allocation of resources between formal and informal activities, than a result of intrinsic characteristics of the production processes in the industrial and service sectors.

Author(s): Alcaraz Carlo; Chiquiar Daniel; Ramos Francia Manuel     

External publications: Economics Bulletin, Vol. 31, Issue 3, pp. 2500-2508.

Summary: The formal Mexican labor market has shown important changes in the last five years: the employment in the industry has been decreasing whereas the employment in the service sector has been increasing. This study looks at the consequence of such changes on the aggregate productivity of the formal sector. This work uses the data set of wages and number of workers from the Mexican Social Security Institute (Instituto Mexicano del Seguro Social). The results suggest that changes in the composition of the formal employment in Mexico did not significatively affect the average workers productivity in the formal sector. Given the relevance of the informal sector in Mexico and that in the last five years the formal employment has grown at lower rates than the economically active population, it is suggested that further analysis on this subject should consider informal employment as well.

Author(s): García Verdú Rodrigo; Alcaraz Carlo     

Summary: The present study calculates the proportional liquidity usage of the Mexican Real Time Settlement Payment System, SPEI, during a one month period. In particular, our interest is to get insights on how different is the liquidity level at the settlement in real time of low and large value payment transactions. To that end, we create an artificial environment, in which we use historical data from April 7 to May 7, 2010 and reproduce the operational conditions of SPEI. For each of these days, we arrange the transactions in four sets, delimited according to their value: all payments, payment orders with value higher than 100,000 MXN; transactions with value higher than 1,000,000 MXN and payments with value higher than 10,000,000 MXN. We measure the liquidity usage in different settings of settlement speed requirements. We find that among participants settlement strategies are heterogeneous. In particular, according to the size of the payment order, on weekly basis participants follow different patterns for settlement. Even further, payments within the same set are not homogeneously treated by banks.

Author(s): Alexandrova-Kabadjova Biliana; Solís-Robleda Francisco     

Summary: Payment systems play a key role in the financial infrastructure of all modern economies. Participants of payment systems need access to intraday liquidity to fulfill their payment obligations. They do that either using their own funds, which are costly, or recycling incoming payment. In order to rely on incoming payments, banks could delay the settlement of their own payment obligations. From the regulators' point of view it is important to know to what degree participants rely on the payments they receive from others. In Mexico, this is among the first studies that analyze from this perspective the intraday liquidity management of the Real Time Settlement Payment System, SPEI. We examine a data set of transactions from April 7 to May 7, 2010 in order to get insights of the participants' behavior regarding the delay of sending payment orders.

Author(s): Alexandrova-Kabadjova Biliana; Solís-Robleda Francisco     

Summary: With the purpose of measuring and monitoring systemic risk, some topological properties of the interbank exposures and the payments system networks are studied. We propose non-topological measures which are useful to describe the individual behavior of banks in both networks. The evolution of such networks is also studied and some important conclusions from the systemic risks perspective are drawn. A unified measure of interconnectedness is also created. The main findings of this study are: the payments system network is strongly connected in contrast to the interbank exposures network; the type of exposures and payment size reveal different roles played by banks; behavior of banks in the exposures network changed considerably after Lehmans failure; interconnectedness of a bank, estimated by the unified measure, is not necessarily related with its assets size.

Author(s): Martínez-Jaramillo Serafín; Alexandrova-Kabadjova Biliana; Bravo-Benítez Bernardo; Solórzano-Margain Juan Pablo     

Summary: We investigate the payment card's adoption rate under consumers' and merchants' awareness of network externalities, given two levels of Interchange Fees in a multiagent card market. For the purpose of our research, in multiple instances of the model (scenarios) the investigated effects are analyzed over the complete process of adoption, until the market's saturation point is achieved. For each scenario, a comparison is made between two different levels of Interchange Fees and different degrees of consumers' and merchants' awareness. We model explicitly the interactions between consumers and merchants at the point of sale. We allow card issuers to charge consumers with fixed fees and provide net benefits from card usage, whereas acquirers can charge fixed and transactional fees to merchants.

Author(s): Alexandrova-Kabadjova Biliana; Castellanos Pascacio Sara Gabriela; García-Almanza Alma L.     

External publications: Simulation in Computational Finance and Economics: Tools and Emerging Applications, IGI Global, Chapter 1, pp. 1-28.

Summary: How is the size of the informal sector affected when the distribution of social expenditures across formal and informal workers changes? Given this distribution, how is it affected when the generosity of these transfers changes? We use a search frictions model with informality, (ex post) heterogeneous workers, and conditional taxes and transfers. In the model, formal jobs are "better" than informal jobs, but harder to get. Taxes are proportional to the wage, while transfers are lump sum, implying a cross-subsidy from high-income to low-income workers. As a result, the marginal worker weighs two opposing forces: changes in taxes vs. changes in transfers. We calibrate the model to Mexico and perform counterfactuals. We find that informality is quite inelastic due to frictions, and due to the opposing forces of taxes and transfers.

Author(s): Alonso-Ortiz Jorge; Leal-Ordoñez Julio C.     

Author(s): Díez-Canedo Juan; Vera y Ferrer Gabriel; Altimir Oscar; Bergsman Joel; Zazueta César; Rizzo Sócrates; Maldonado Víctor; Reyes Heroles Jesús; Cervantes Jesús; Gómez Octavio; Arnaud Enrique; Gibson William; Lusting Nora; Taylor Lance     

Author(s): Díez-Canedo Juan; Vera y Ferrer Gabriel; Altimir Oscar; Bergsman Joel; Zazueta César; Rizzo Sócrates; Maldonado Víctor; Reyes Heroles Jesús; Cervantes Jesús; Gómez Octavio; Arnaud Enrique; Gibson William; Lusting Nora; Taylor Lance     

Author(s): Díez-Canedo Juan; Vera y Ferrer Gabriel; Altimir Oscar; Bergsman Joel; Zazueta César; Rizzo Sócrates; Maldonado Víctor; Reyes Heroles Jesús; Cervantes Jesús; Gómez Octavio; Arnaud Enrique; Gibson William; Lusting Nora; Taylor Lance     

Summary: We use the national Input-Output Matrix 2012 of INEGI and Flegg's approach to estimate four Regional Input-Output Matrices (RIOM) applying Banco de Mexico's regionalization. The RIOM are employed to evaluate the effects on gross output, value added and employment at the regional level resulting from two shocks: (a) the construction of a hypothetical automotive plant worth 1,000 million dollars; and (b) the production of 200,000 vehicles per year in that plant. The exercise reveals that: (i) the construction and the operation of the plant at full capacity have differentiated effects across regions and sectors on the studied variables, in both absolute and relative terms; (ii) the spillover effects resulting of both shocks within each region are concentrated in a limited number of sectors; and (iii) the north central region resulted to be the one receiving the largest relative benefits from both shocks.

Author(s): Torre Cepeda Leonardo E.; Alvarado Jorge; Quiroga Miroslava     

Summary: Based on the national Input-Output Matrix (IOM) 2012 calculated by INEGI, we use Flegg's approach to estimate four regional Input-Output Matrices (RIOMs) using Banco de México's regionalization (Northern, North-Central, Central and Southern). The RIOMs are employed to evaluate the impact on regional gross output, value added and employment resulting from a 10,000 million dollar shock on Mexican manufacturing exports. The results show that the effects on the absolute values of gross output, value added and employment in the North are clearly larger than those estimated for the other regions. Another finding is that the total effects of the regional shocks tend to concentrate in the manufacturing sector, with the highest concentration observed in the North, and the lowest in the South. We also find that indirect effects of these shocks tend to be larger in regions far from the US border.

Author(s): Chiquiar Daniel; Alvarado Jorge; Quiroga Miroslava; Torre Cepeda Leonardo E.     

Summary: In this paper I develop a simple dynamic agency model postulating that, among budgetary institutions, transparency of the budgeting process is the main driving force in explaining differences in fiscal outcomes and that budgetary numeric rules can be an active long-run constraint only if the budgeting process is transparent enough. The model does not only account for long-run differences where countries with better budgetary institutions will have more disciplined fiscal outcomes, but can rationalize situations where countries with relatively better budgetary institutions can have what would appear to be less disciplined fiscal outcomes in the short-run. Empirical tests corroborate some but not all of the model's predictions.

Author(s): Amoroso Nicolás     

Summary: We analyze if the pattern of comparative advantages and the recent behavior of Mexican manufacturing exports, vis-à-vis its closest competitors, are related with productivity differentials or with differences in factor endowments. The relative abundance of relatively unskilled labor in Mexico locates this country in markets where other large countries with similar factor endowments, such as China, have entered rapidly. In comparison with China and other similar competitors, the most important determinant of Mexico's comparative advantages and export performance seems to be productivity differentials. When Mexico is compared against other relevant competitors that have been able to rise faster in the value chain, Mexican export performance also seems to reflect its relatively small endowment of human capital.

Author(s): Amoroso Nicolás; Chiquiar Daniel; Quella Núria; Ramos Francia Manuel     

External publications: The North American Journal of Economics and Finance, Vol. 22, Issue 2, pp. 164-196.

Summary: This paper estimates the crowding out of private transfers caused by 70 y Más -a public assistance program for rural elderly adults in Mexico, for whom family support is an important source of income. Using data from the National Household Income and Expenditure Survey and a triple-difference estimation, we find that the program crowds out private transfers by 37 percent, and it does so mainly by reducing the probability of receiving domestic remittances. As a result, the non-labor income of beneficiaries increases by less than their government transfers. Thus, by reducing their private support to elderly adults, domestic donors are dampening the effect of the program, although not completely neutralizing it.

Author(s): Amuedo Dorantes Catalina; Juárez González Laura     

Summary: In a typical developing country, coverage of the contributory social security system is low. We analyze the aggregate effects of a revenue-neutral fiscal-cum-social policy reform that consists of: 1) the implementation of universal social insurance to replace the system with low coverage; and 2) the elimination of the social security payroll tax to replace it with a generalized VAT. We find that this reform increases productivity by 2 percent and output by 3 percent as it improves the allocation of resources across firms and sectors, and generates a substantial change in occupational choices. Thus, wages (before transfers) increase for all employees. Also, due to the reconfiguration of transfers, earnings (wages after transfers) for informal employees increase relative to the earnings of formal employees, which decreases inequality. However, the reform could affect some groups in the population, given the regressive nature of VAT and heterogeneity in the valuation of transfers across workers.

Author(s): Antón Arturo; Leal-Ordoñez Julio C.     

Summary: During the last years, Mexico has registered relatively large output falls. The business cycle accounting method of Chari, Kehoe and McGrattan (2007) is applied to the two most recent recessions in Mexico (including the "Tequila crisis") in order to understand what are the most important wedges driving output over the cycle and to evaluate to what extent such falls may be smoothed. First, it is found that efficiency and labor wedges may reasonably account for output fluctuations in each recession. Second, counterfactual exercises suggest that the elimination of distortions represented in terms of the efficiency wedge might result in output falls about one third of those observed in the data.

Author(s): Antón Sarabia Arturo     

Summary: In a recent paper, Gertler, Gilchrist and Natalucci (2006) report that the financial accelerator mechanism may account for about half of the fall in output and investment observed during the Korean crisis of 1997-1998. Using the business cycle accounting method of Chari, Kehoe and McGrattan (2006a), this paper finds that such a result is very sensitive to the value of Tobin's q elasticity. The implication is that the adjustment cost function may be crucial in terms of the relative importance of distortions for explaining business cycle fluctuations.

Author(s): Antón Sarabia Arturo     

Author(s): Werner Wainfeld Alejandro; Aportela Rodríguez Fernando     

Author(s): Aportela Rodríguez Fernando; Ardavín Ituarte José Antonio; Cruz Aguayo Yyannú     

Author(s): Aportela Rodríguez Fernando     

Author(s): Aportela Rodríguez Fernando; Ardavín Ituarte José Antonio; Cruz Aguayo Yyannú     

Author(s): Arias S. Luis Gerardo; Guerrero Víctor M.     

Summary: A tool that has been widely used to identify the state of financial conditions in a country are the financial conditions indexes, since they synthesize information from different variables in a single indicator allowing to identify the general behavior of financial conditions in a timely and condensed manner. In this paper we construct and analyze a Financial Conditions Index (FCI) for Mexico that allows to capture diverse episodes of financial stress and to know the main factors behind movements in financial conditions. The results show that this FCI adequately captures moments of astringency in financial markets in Mexico such as the financial crisis of 2008-2009, the crisis in Europe in mid-2011, the beginning of the "tapering talk" in the United States in the second half of 2013, among others.

Author(s): Armendáriz Villarreal Thelma; Ramírez Claudia     

Author(s): Díez-Canedo Juan; Vera y Ferrer Gabriel; Altimir Oscar; Bergsman Joel; Zazueta César; Rizzo Sócrates; Maldonado Víctor; Reyes Heroles Jesús; Cervantes Jesús; Gómez Octavio; Arnaud Enrique; Gibson William; Lusting Nora; Taylor Lance     

Author(s): Díez-Canedo Juan; Vera y Ferrer Gabriel; Altimir Oscar; Bergsman Joel; Zazueta César; Rizzo Sócrates; Maldonado Víctor; Reyes Heroles Jesús; Cervantes Jesús; Gómez Octavio; Arnaud Enrique; Gibson William; Lusting Nora; Taylor Lance     

Author(s): Díez-Canedo Juan; Vera y Ferrer Gabriel; Altimir Oscar; Bergsman Joel; Zazueta César; Rizzo Sócrates; Maldonado Víctor; Reyes Heroles Jesús; Cervantes Jesús; Gómez Octavio; Arnaud Enrique; Gibson William; Lusting Nora; Taylor Lance     

Summary: We use a novel data set on firm vacancies and job seekers from a Mexican government job placement service to analyze whether changes in matching frictions can explain the large and persistent increase in Mexican unemployment after the 2008 global financial crisis. We find evidence of a statistically signicant reduction in the efficiency of the matching function during the crisis. The estimated effect explains about 70 basis points of the 233 basis points observed increase in the unemployment rate. Hence, these results suggest that changes in matching frictions cannot explain most of the increase in unemployment.

Author(s): Arroyo Miranda Juan; Gómez Cram Roberto; Lever Guzmán Carlos