Autonomous demand and economic growth in Mexico (1993–2019): theory and empirics in a small, open and peripheral economy

Highlighting the role of autonomous components of demand in shaping the long-run growth path of the economy, the Sraffian supermultiplier (SSM) has attracted increasing attention. This paper aims to empirically test some implications of this model for a small, open and peripheral economy, such as Mexico. After presenting the theory and evidence on the SSM, we review the recent literature on growth in Mexico. We present some stylized facts along with the decomposition of growth of the Mexican economy for the period 1993–2019. Then, using a VECM we assess both the short-run adjustment as well as the long-run relations between autonomous demand and output, confirming that the two variables move in step in the long run. Lastly, we compute Impulse Response Functions (IRFs) to evaluate the dynamic effect of a shock in autonomous demand on GDP, providing evidence that an expansion of autonomous demand produces a positive, persistent and statistically significant effect on the level of GDP. As a result, we show that the SSM is a valid framework to assess economic growth even in a small, open and peripheral economy.