Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from Mexico´s Manufacturing Sector
AbstractIn this paper we study the effect of NAFTA on the responsiveness of the Mexican economy to real exchange rate shocks. We argue that, by opening the U.S. and Canadian markets to Mexican goods, NAFTA made it easier for domestic producers to take advantage of the opportunities brought by the depreciation of the real exchange rate. To identify this mechanism, we use plant-level data and compare the behavior of employment, production and investment after two big real exchange rate shocks: the first observed in the mid 1980s, the second the Tequila Crisis of 1994-1995. The evidence indicates that after passage of NAFTA exporting firms exhibited higher growth rates of employment, sales, and investment vis-à-vis non-exporters. We confirm our results by analyzing the behavior of a control group of firms, that had complete access to the U.S. market during both devaluations, and we show that they responded in a similar way in both events. Finally, we also provide direct evidence on the relationship between exports and tariff reductions brought about by NAFTA. Our results support the view that NAFTA has allowed Mexican producers to respond more quickly to real exchange rate shocks.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 583.
Date of creation: Jun 2010
Date of revision:
Other versions of this item:
- Miguel Fuentes & Pablo Ibarrarán, 2006. "Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from Mexico’s Manufacturing Sector," Documentos de Trabajo 312, Instituto de Economia. Pontificia Universidad Católica de Chile..
- Fuentes, Miguel & Ibarrarán, Pablo, 2009. "Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from Mexico’s Manufacturing Sector," IZA Discussion Papers 4494, Institute for the Study of Labor (IZA).
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-23 (All new papers)
- NEP-DEV-2011-04-23 (Development)
- NEP-OPM-2011-04-23 (Open Economy Macroeconomic)
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