Discussion Paper

NAFTA and Mexican development

Abstract: Using a calibrated growth model, the dynamic effects of NAFTA on Mexican development are studied. Two scenarios are analyzed. In the first, NAFTA is assumed to stimulate inflows of physical capital into Mexico. These inflows reduce the interest rate and raise the wage rates for both skilled and unskilled labor. The skilled wage rises more sharply, however, increasing the skill premium and rapidly accelerating the accumulation of human capital. In the second scenario, NAFTA is assumed to have the effect of fully integrating Mexico with the U.S. and Canada. Integration also reduces the interest rate and raises both wage rates in Mexico, but in this case the skill premium falls and human capital accumulation speeds up only a little. The welfare gains are large in both cases.

Keywords: Economic development; Mexico; North American Free Trade Agreement;

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Discussion Paper / Institute for Empirical Macroeconomics

Publication Date: 1996

Number: 108