Capability of Financial Variables to Raise the Productivity of Investment: A Reassessment for the Mexican Economy

Abstract

Departing from the prior-saving approach, which predicts financial development encourages economic growth by raising the amount of lendable funds, this paper analyses the effect of financial variables -real rate of interest and financial deepening ratio, on the productivity of investment. However, testing the performance of the Mexican economy over the 1970-2020 period, evidence lays on the investment-led approach favour, i.e., that as the economy grows it generates additional and new demand of resources from the financial system. Nothing to do with the pretended greater quality of private investment over public investment. To document such finding, firstly, the research describes the sort of financial cul-de-sac Mexico seems to endure in the 1980´s as a huge external debt combined with growing external interest rates lured into the overhaul of its financial system. Secondly, both the liberalisation and the post-Keynesian financial models are depicted on their relevant basics. It also assigns a special emphasis to the financial-deepening ratio. Thirdly, the effect of financial variables on the productivity of investment are tested. Finally, conclusions to be drawn from this research are drawn, standing out that it cannot be concluded financial variables determine the productivity of investment.