A test of purchasing power parity: Texas Border retail trade and the value of the Peso 1976–1987

Abstract

The peso devaluations of 1982-1983 caused a severe disruption in the Texas economy along the Texas-Mexico border. The proximate cause of these devaluations was the disparity between the inflation rates in the United States and Mexico. This disparity was accompanied by capital flight from Mexico as Mexican citizens attempted to protect the purchasing power of their financial assets. Another result of this disparity was boom conditions in the retail trade sector along the Texas side of the border. The Texas border region developed a thriving trade sector economy. Thus, the precipitous fall in the international purchasing power of the peso resulted in widespread business failure and unemployment. The collapse of the trade sector added to the relative poverty of the border region of Texas. This region has traditionally led the balance of the state in unemployment and lagged behind the state in income. There is very little industrial development in this region, and existing industry was unable to expand to alleviate the additional economic hardship that occurred in the aftermath of the peso devaluations.