Price Adjustments Patterns in Mexico and The United States

Abstract

This study utilizes Engel-Granger’s (1987) cointegration methodology to investigate the adjustment patterns of prices in Mexico and the U.S. The empirical findings reveal discrepancies in the magnitudes of speed-of-adjustment coefficients between Mexican and US prices. The results also indicate that the adjustment of Mexican price relative to that of the U.S. seems to be lower in the NAFTA era, as compared to that of earlier periods. This phenomenon would seemingly contradict the conventional wisdom and may be attributable to the fact that, in the NAFTA era, the smaller Mexican economy has been well-integrated into the larger U.S. economy, with its price level’s slowly following that of the U.S.