Made in Mexico: Energy Reform and Manufacturing Growth

February 27, 2015

Preview Citation

Format: Chicago

Jorge A Alvarez, and Fabian Valencia. Made in Mexico: Energy Reform and Manufacturing Growth, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper assesses the real effects of the energy reform in Mexico by looking at its impact on manufacturing output through changes in energy prices. Using sub-sector and state-level manufacturing output data, along with past variation in energy prices, we find electricity prices––relative to oil and gas––to be more important in the manufacturing process, with a one standard deviation reduction in electricity prices leading to a 2.8 percent increase in manufacturing output. Our estimated elasticities together with plausible reductions in electricity tariffs derived from the energy reform, could increase manufacturing output by up to 3.6 percent, and overall real GDP by 0.6 percent. Larger reductions are possible over the long run if increased efficiency in the sector leads electricity prices to converge to U.S. levels. Moreover, including the impact of lower electricity tariffs on the services sector, could lead to significantly larger effects on GDP. Accounting for endogeneity of unit labor costs in a panel VAR setting leads to an additional indirect channel which amplifies the impact of electricity prices on output.

Subject: Commodities, Economic sectors, Electricity, Energy prices, Manufacturing, Natural gas sector, Oil prices, Prices

Keywords: Electricity, Electricity price, Energy price, Energy prices, Energy reform, Gas, Global, Growth, Input price, Manufacturing, Manufacturing output, Mexico, Natural gas sector, Oil derivatives price, Oil price, Oil prices, Panel VAR, Price effect, Transportation cost, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/045
Stock No:

WPIEA2015045
ISBN:

9781498376426
ISSN:

1018-5941

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