IMF Working Papers

Mexico’s Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates and Transaction Costs

Author/Editor:

Luciana Juvenal ; Rodolphe Blavy

Publication Date:

May 1, 2008

Electronic Access:

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Summary:

A self-exciting threshold autoregressive model is used to measure transaction costs that may explain relative price differentials and nonlinearities in the behavior of sectoral real exchange rates across Mexico, Canada and the U.S. Interpreting price threshold bands as transactions costs, we find evidence that Mexico still face higher transaction costs than their developed counterparts, even though trade liberalization lowers relative price differentials between countries. The distance between countries and nominal exchange rate volatility are found to be determinants of transaction costs that limit price convergence. Other factors-including weak domestic competition and transportation-are also likely to be important.

Series:

Working Paper No. 2008/123

Subject:

Arbitrage Consumer price indexes Exchange rates North American Free Trade Agreement Real exchange rates