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

Download or read book Mexico's Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates and Transaction Costs written by Rodolphe Blavy and published by INTERNATIONAL MONETARY FUND. This book was released on 2008-05-01 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.