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 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 InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4494.
Length: 66 pages
Date of creation: Oct 2009
Date of revision:
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Other versions of this item:
- 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.
- Miguel Fuentes & Pablo IbarrarÃ¡n, 2006. "Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from MexicoÂ’s Manufacturing Sector," Documentos de Trabajo 312, Instituto de Economia. Pontificia Universidad Católica de Chile..
- 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-2009-11-07 (All new papers)
- NEP-INT-2009-11-07 (International Trade)
- NEP-OPM-2009-11-07 (Open Economy Macroeconomic)
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