Mexico'S Integration Into Nafta Markets

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.Exchange rates;Real effective exchange rates;Prices;exchange rate, pre-nafta, real exchange rate, real exchange rates, market integration, exchange rate volatility, transactions costs, nominal exchange rate, trade liberalization, real exchange rate dynamics, exchange rate deviations, exchange rate dynamics, exchange rate movements, trade barriers, transport costs, domestic prices, exchange rate fluctuations, international trade, domestic competition, trading partners, process of liberalization, internal distribution, industry trade, regional trade, tradable goods, income differences, trade patterns, effective exchange rates, exchange rate changes, reducing barriers, nominal exchange rates, domestic firms, exchange rate pass, international trade agreements, trade agreements, domestic goods, external trade, regional trade liberalization, domestic price