Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from MexicoÂ’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 firrst observed in the mid 1980s, and the second the Tequila Crisis of 1994-5. The evidence indicates that after the passage of NAFTA exporting firms exhibited higher growth rates of employment, sales, and investment vis-Ã¡-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 by NAFTA. Our results support the view that NAFTA has allowed Mexican producers to respond more quickly to real exchange shocks.
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Bibliographic InfoPaper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 312.
Date of creation: 2006
Date of revision:
Other versions of this item:
- 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).
- Miguel Fuentes & Pablo Ibarrarán, 2010. "Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from Mexico´s Manufacturing Sector," Working Papers Central Bank of Chile 583, Central Bank of Chile.
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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