Trade deficit as a determinant of the interest rate and capital flows in Mexico from 1950 to 2014. A heterodox approach

Abstract

This article aims to test the hypothesis that countries with trade balance deficits need to set high interest rates to attract capital flows. In a series of papers, A. Shaikh has assembled this hypothesis based on Marx, Classical economists, and post-Keynesians such as Harrod. In this article, we used Mexico from the period 1950 to 2014 as a case study. In order to test our hypothesis, we use econometric techniques such as Granger causality to prove whether or not trade balance precedes and is a good predictor of the real interest rate free of risk.