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

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Author Info
Rodolphe Blavy
Luciana Juvenal

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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.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-046.

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Date of creation: 2008
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Handle: RePEc:fip:fedlwp:2008-046

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

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  6. Luciana Juvenal & Mark P. Taylor, 2008. "Threshold Adjustment of Deviations from the Law of One Price," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 12(3). [Downloadable!]
  7. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-19, September. [Downloadable!] (restricted)
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  17. Charles Engel & John H. Rogers & Shing-Yi B. Wang, 2003. "Revisiting the Border: an assessment of the law of one price using very disaggregated consumer price data," International Finance Discussion Papers 777, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  21. Peel, David A & Taylor, Mark P, 2002. "Covered Interest Rate Arbitrage in the Interwar Period and the Keynes-Einzig Conjecture," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 51-75, February.
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