IMF Working Papers

Per capita growth of the Mexican economy has lagged behind G20 peers in past decades with notable disparities between the north and south. In this paper, we build on the income convergence literature by examining the impact of domestic market integration on regional growth. To this end, we incorporate insights from the Law of One Price and construct a novel measure of the strength of domestic market integration from micro-level price data. We find that domestic market integration is strongly associated with regional growth and its spillovers, along with other structural factors such as human capital and infrastructure. Our result also indicates that neighboring states’ income level and their integration into the national economy is positively correlated with a state’s growth, suggesting cross-state spillover effects and regional clustering.