Mexico’s Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates and Transaction Costs
IMF Working Papers, May 1, 2008
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- Mexico’s Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates and Transaction Costs
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Bibliographic details
- Authors: Luciana Juvenal, Rodolphe Blavy
- Published: May 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451869835.001
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, the authors 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.
Methodology
- Econometric approach: self-exciting threshold autoregressive model.
- Application: sectoral real exchange rates across Mexico, Canada and the U.S.
- Interpretation: price threshold bands are taken as measures of transaction costs that impede arbitrage and price convergence.
Key Findings
- Mexico faces higher transaction costs than Canada and the U.S., inferred from wider price threshold bands in sectoral real exchange rates.
- Trade liberalization lowers relative price differentials between countries.
- Determinants of transaction costs identified:
- Distance between countries.
- Nominal exchange rate volatility.
- Additional likely contributors to persistent transaction costs:
- Weak domestic competition.
- Transportation.
Policy Implications and Interpretations
- Reducing nominal exchange rate volatility could help lower transaction costs and improve price convergence.
- Policies addressing transportation inefficiencies and strengthening domestic competition may further reduce transaction costs.
- Trade liberalization has a role in lowering relative price differentials but does not fully close the gap in transaction costs between Mexico and developed NAFTA partners.