Our Journals
IJED Articles 
Testing for a Long-Run Relationship between Public Capital and Labor Productivity in Mexico: A DOLS and FMOLS Analysis
Miguel D. Ramirez
IJED, Vol. 18 No. 1,
(2025)
This paper investigates the important question of whether there is a long run relationship between the private (public) capital stock and economic output (labor productivity) in Mexico over the 1960-2020 period. Several important findings are uncovered. First, it is established that the underlying private production function exhibits constant returns to scale and that the included regressors are non-stationary in level form (controlling for the presence of a single break). Second, the non-stationary, I(1), variables included in the underlying production function have a stable and long-term (cointegrating) relationship even in the presence of a regime (shift and trend) break. Next, the VECM methodology determined that some of the included variables can be treated as weakly exogenous, viz., the stocks of private and public capital. Fourth, both FMOLS and DOLS estimation of the underlying production (labor productivity) function for Mexico is undertaken and the results provide robust evidence in favor of the argument that both the private and public stocks of capital increase economic output and labor productivity over the period under review. The estimates also reveal the lackluster performance of Mexico’s labor productivity over the period in question. The estimators utlized in this study are extremely consistent even in the presence of both endogeneity and serial correlation of any order. From a policy standpoint, these results suggest that across-the-board cuts in public spending to meet targeted fiscal deficits as a proportion of GDP should be made carefully (paying attention to their composition) so as not to undermine public capital (infrastructure) spending which, in turn, may negatively affect long run growth and labor productivity.
