Abstract
I use a global vector autoregression (GVAR) model with quarterly data since the inception of NAFTA (1994Q1–2016Q4) to investigate the effects of trade shocks to the USA and Mexico on major macroeconomic variables of Canada, Mexico and the USA. Structural generalized impulse response functions (SGIRF’s) are used to conduct the dynamic analysis and time varying trade weights are used to construct the foreign variables in each country model. The results show that the trade shocks have a significant positive impact in the region. A positive trade shock in the USA and Mexico increases output growth, wages, and equity prices and decreases unemployment rate in all the countries. However, inflation increases. The inclusion of China in the model dampens the positive effect of the USA and Mexican trade shock.
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