An Error Correction Analysis of U.S.-Mexico Trade Flows

Estimation of bilateral trade elasticities is less well documented than is the case for aggregate trade flows. This study estimates bilateral trade equations for Mexico and the United States. The empirical analysis is carried out using an error correction approach that allows imports and exports to adjust over time to changes in the independent variables that affect the demands for them. Results obtained indicate that imports and exports between the two neighbors react heterogeneously to variations in domestic prices, foreign prices, and currency values. Lag structures between the two trade equations also differ from each other.