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Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from Mexico’s Manufacturing Sector

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  • Fuentes, Miguel

    ()
    (Central Bank of Chile)

  • Ibarrarán, Pablo

    ()
    (Inter-American Development Bank)

Abstract

In this paper we study the effect of NAFTA on the responsiveness of 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 1994-5. The evidence indicates that after passage of NAFTA exporting firms exhibited higher growth rates of employment, sales, and investment vis-á-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 Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4494.

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Length: 66 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4494

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Keywords: NAFTA; RER Shocks; Tequila Crisis; external adjustment; firm-level evidence of effects of RER Shocks;

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  1. Sangeeta Pratap & Carlos Urrutia, 2004. "Firm Dynamics, Investment, and Debt Portfolio: Balance Sheet Effects of the Mexican Crisis of 1994," Working Papers 0406, Centro de Investigacion Economica, ITAM.
  2. Aitken, Brian & Harrison, Ann & Lipsey, Robert E., 1996. "Wages and foreign ownership A comparative study of Mexico, Venezuela, and the United States," Journal of International Economics, Elsevier, vol. 40(3-4), pages 345-371, May.
  3. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, 05.
  4. Gordon H. Hanson & Ann Harrison, 1995. "Trade, Technology, and Wage Inequality," NBER Working Papers 5110, National Bureau of Economic Research, Inc.
  5. Robert Dekle & Hyeok Jeong & Heajin Ryoo, 2006. "A Re-examination of the Exchange Rate Disconnect Puzzle: Evidence from Japanese Firm Level Data," IEPR Working Papers 06.46, Institute of Economic Policy Research (IEPR).
  6. Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
  7. Aaron Tornell & Frank Westermann & Lorenza Martinez, 2004. "NAFTA and Mexico's Less-Than-Stellar Performance," NBER Working Papers 10289, National Bureau of Economic Research, Inc.
  8. Gelos, R. Gaston & Werner, Alejandro M., 2002. "Financial liberalization, credit constraints, and collateral: investment in the Mexican manufacturing sector," Journal of Development Economics, Elsevier, vol. 67(1), pages 1-27, February.
  9. M. Ayhan Kose & Christopher M. Towe & Guy Meredith, 2004. "How Has Nafta Affected the Mexican Economy? Review and Evidence," IMF Working Papers 04/59, International Monetary Fund.
  10. Pratap, Sangeeta & Lobato, Ignacio & Somuano, Alejandro, 2003. "Debt composition and balance sheet effects of exchange rate volatility in Mexico: a firm level analysis," Emerging Markets Review, Elsevier, vol. 4(4), pages 450-471, December.
  11. David Hummels, 2007. "Transportation Costs and International Trade in the Second Era of Globalization," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 131-154, Summer.
  12. Alejandro Izquierdo & Ernesto Talvi & Guillermo A. Calvo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," Research Department Publications 4299, Inter-American Development Bank, Research Department.
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