Unanticipated capital flows and the Mexican economy: An empirical investigation

This research explores the differential impact of unanticipated and anticipated foreign capital flows on Mexico's economy for the period 1965–85. If unanticipated flows cause appreciation of the real exchange rate and do not affect domestic expenditure, one can assume that the country's foreign exchange constraint is not binding. Based on empirical evidence, this hypothesis can be rejected. The implication is that Mexico's problems probably do not stem from overborrowing. Anticipated capital flows do affect private spending, but a negative coefficient suggests that the private sector has borne the brunt of post‐crisis adjustment. The results show that the Mexican government has dominated the expenditure of foreign loans throughout the period.