Mexico’s Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates

Abstract

Using a threshold autoregressive model, we con…rm the presence of nonlinearities in sectoral real exchange rate (SRER) dynamics across Mexico, Canada and the US in the pre-NAFTA and post-NAFTA periods. Measuring transaction costs using the estimated threshold bands, we …nd evidence that Mexico still faces higher transaction costs than their developed counterparts. Trade liberalization is associated with re