Pension Reform and Financial Markets in Mexico: An Econometric Analysis

Goncalo Monteiro and Cecilia Posadas Pérez

Discussion Papers from Department of Economics, University of York

Abstract: In this paper we analyse the implications for the Mexican financial system of substituting the Pay as you go pension system by a private Fully Funded scheme. With that aim, we begin by applying the Standard ADF test, in order to test each variable for the presence of a unit root relation. This test are required to validate the use of the cointegration technique of the Engle-Granger two-steps cointegration methodology, which has the advantage of distinguish a long-term OLS regression and an Error Correction Model for the short-term dynamics. We found that higher pension assets are associated in the long-run with financial savings, which is consistent with the fact that pension fund may act as a institutional investors managing the increased personal savings. With respect to the banking industry, a negative long-run relationship was found. This negative sign can be explained by the declining trend on the credit provided from commercial banks to the private sector and the rise in importance of other financial intermediaries

Date: 2006-12, Revised 2007-03
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