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

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  • Rodolphe Blavy
  • Luciana Juvenal

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.

Suggested Citation

  • Rodolphe Blavy & Luciana Juvenal, 2008. "Mexico's integration into NAFTA markets: a view from sectoral real exchange rates," Working Papers 2008-046, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2008-046
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    2. Chu V. Nguyen, 2016. "Subpar Performance of the Mexican Economy in the NAFTA Era: Plausible Explanations," The International Trade Journal, Taylor & Francis Journals, vol. 30(5), pages 449-463, October.

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    Keywords

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