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Working Paper 2008-046B

"Mexico’s Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates"
by Rodolphe Blavy, and Luciana Juvenal

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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Category > International
Category > Applied Econometrics
Author > Luciana Juvenal
Research Papers and Publications: JEL Code > F31
Research Papers and Publications: JEL Code > F36
Research Papers and Publications: JEL Code > F41