Journal Article

Mexico's integration into NAFTA markets: a view from sectoral real exchange rates

Abstract: The authors use a threshold autoregressive model to confirm the presence of nonlinearities in sectoral real exchange rate dynamics across Mexico, Canada, and the United States for the periods before and after the North American Free Trade Agreement (NAFTA). Although trade liberalization is associated with reduced transaction costs and lower relative price differentials among countries, the authors find, by using estimated threshold bands, that Mexico still faces higher transaction costs than its developed counterparts. Other determinants of transaction costs are distance and nominal exchange rate volatility. The authors' results show that the half-lives of sectoral real exchange rate shocks, calculated by Monte Carlo integration, imply much faster adjustment in the post-NAFTA period.

Keywords: Mexico; North American Free Trade Agreement; Foreign exchange rates;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Review

Publication Date: 2009

Volume: 91

Issue: Sep

Pages: 441-464