Financial Structure and Economic Activity in Mexico

Martina Copelman, World Bank, February .


The effectiveness with which a country's financial system functions to channel savings into productive activities has an important effect on economic growth. The way savings get directed into productive activities depends crucially on a country's financial institutions and their effectiveness. The last two decades have been ones of tremendous change in Mexico's financial structure with a deep impact on economic activity and growth. The aim of this paper is twofold: first, to describe the developments that have transpired in Mexico's financial structure over the last two decades. And second, to analyze how the increase in credit to the private sector brought about by these macroeconomic and financial developments affected output and investment in different sectors and therefore, growth in the Mexican economy. The author uses the Vector Error Correction methodology to show that an increase in the availability of credit has a relatively larger effect on the output of those sectors that are a priori considered to be more liquidity constrained, such as manufacturers, durables, construction, and investment in the construction sector.

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