Business cycles in Mexico: insights from a small open economy dsge model

Abstract

This dissertation examines financial crises and Sudden Stops in Mexico through the lens of a small open-economy DSGE model that incorporates occasionally binding colateral constraints. Solved with global methods and calibrated to quarterly Mexican data, the model considers endowment shocks and joint interest rate–tradables shocks. A key feature of this model is its ability to generate multiple equilibria. Results show that interest rate and tradables shocks better match data moments—especially output persistence and RER dynamics—than endowment-only shocks. Crises are infrequent but severe, with equilibrium selection affecting their intensity and frequency. While the model captures key stylized facts, it overstates volatility. These findings highlight the role of financial frictions in EMEs and may offer a basis to inform and advance the discussion on macroprudential policy in Mexico.