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Firm Dynamics And Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence From Mexico?s Manufacturing Sector

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Executive Summary

In this paper, the authors study the effect of NAFTA on the responsiveness of the Mexican economy to real exchange rate shocks. They argue that, by opening the U.S. and Canadian markets to Mexican goods, NAFTA made it easier for domestic producers to take advantage of the opportunities brought by the depreciation of the real exchange rate. To identify this mechanism, they use plant-level data and compare the behavior of employment, production and investment after two big real exchange rate shocks: the first observed in the mid 1980s, the second the Tequila Crisis of 1994-1995.

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