Firm Dynamics and Real Exchange Rate Fluctuations:Does Trade Openness Matter?Evidence from Mexico’s Manufacturing Sector

In this paper we study the effect of NAFTA on the responsiveness of Mexican economy toreal exchange rate shocks. We argue that, by opening the U.S. and Canadian markets toMexican goods, NAFTA made it easier for domestic producers to take advantage of theopportunities brought by the depreciation of the real exchange rate. To identify thismechanism, we use plant-level data and compare the behavior of employment, productionand investment after two big real exchange rate shocks: the first observed in the mid 1980s,the second the Tequila Crisis of 1994-5. The evidence indicates that after passage of NAFTAexporting firms exhibited higher growth rates of employment, sales, and investment vis-á-visnon-exporters. We confirm our results by analyzing the behavior of a control group of firms,that had complete access to the U.S. market during both devaluations, and we show thatthey responded in a similar way in both events. Finally, we also provide direct evidence onthe relationship between exports and tariff reductions brought by NAFTA. Our results supportthe view that NAFTA has allowed Mexican producers to respond more quickly to realexchange shocks....