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

Rodolphe Blavy and Luciana Juvenal

No 2008-046, Working Papers from Federal Reserve Bank of St. Louis

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 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2008
New Economics Papers: this item is included in nep-ifn and nep-opm
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Citations: View citations in EconPapers (1)

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