An Oil-Producing State's Ability to Cope with External Shocks after a Regional Free Trade Agreement: The Case of Texas and NAFTA

Abstract

This article examines the potential economic effects that the 1994 North American Free Trade Agreement (NAFTA) had on Texas — an oil producing, large border state. We estimate a five-variable vector autoregressive (VAR) model with quarterly data from January 1976 to March 2011 and construct a structural VAR representation by imposing long-run restrictions to identify U.S. aggregate, oil price, and Texas-specific shocks. After comparing responses to these structural shocks before and after NAFTA, our results suggest that NAFTA contributed to Texas’ economy, becoming more resilient to oil price and non-Texas disruptions.