NAFTA, capital mobility, and Mexico's financial system

Abstract

Typically the impact of the North American Free Trade Agreement (NAFTA) is analyzed from a macroeconomic perspective, to examine the implications for capital market flows or for the aggregate degree of financial integration. This analysis often involves examining whether certain conditions of arbitrage or efficiency tend to hold, given greater integration of financial markets. Alternatively, other work examines only the effects of greater financial integration for the efficiency with which financial services are provided microeconomically. The two approaches are rarely combined, nor are the effects of integration considered within such a combined framework. The authors combine the two approaches to examine how NAFTA will affect capital flows and the efficiency with which financial services are provided in Mexico. They also call attention to domestic financial systems and monetary and exchange rate policy issues that Mexico must address if greater financial integration is not to result in increased risk for the domestic financial system or greater macroeconomic instability.Payment Systems&Infrastructure,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,International Terrorism&Counterterrorism,Macroeconomic Management,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Environmental Economics&Policies