ABSTRACT
A small econometric model of the Mexican economy then focuses on the equilibrating responses of a few key static and interpretable relative prices. Mexico’s collapse of fiscal control in the early 1970s stands out in the historical context of several decades of solid fiscal conservatism. The subsequent story for Mexico is one of major fiscal retrenchment and structural reform. Mexico’s structural adjustment measures are also wide-ranging and thorough. A major liberalization effort, symbolized in the field of international trade by Mexico joining the GATT, has resulted in a significant reorientation of production towards export markets and a very rapid growth of non-oil exports. Central to van Wijnbergen’s small macroeconomic model of the Mexican economy is the role of the real exchange rate and the real interest rate.
