Working Paper

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

Abstract: Using a self-exciting threshold autoregressive model, we confirm the presence of nonlinearities in sectoral real exchange rate (SRER) dynamics across Mexico, Canada and the US in the pre-NAFTA and post-NAFTA periods. Measuring transaction costs using the estimated threshold bands, we find evidence that Mexico still faces higher transaction costs than their developed counterparts. Trade liberalization is associated with reduced transaction costs and lower relative price differentials among countries. Other determinants of transaction costs are distance and nominal exchange rate volatility. Our results show that the half-lives of SRERs shocks, calculated by Monte Carlo integration, imply much faster adjustment in the post-NAFTA period.

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

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2008

Number: 2008-046

Pages: 36 pages