Jaramillo-Villanueva Jose Luis: Exchange Rate Movements and

The favorable Mexico-United States exchange rate has been cited as an important factor for the growth in exports of agri-food products from Mexico to the United States. Some analysts have also emphasized the importance of NAFTA and the exchange rate volatility in the performance of the Mexico-US agri- food trade. An important policy question is the extent to which changes in the Mexico-US exchange rate and its volatility have contributed to the growth in agri-food trade between these two countries. The results from cointegration analysis show that while changes in exchange rate have a positive effect on trade flows, volatility of the exchange rate has a negative effect on trade flows. The results indicate that the volatility measure generated from a GARCH (1,1) model provides more consistent results in terms of signs and sizes of the estimated coefficients than those from other volatility measures. While VEC models provide results supporting the findings of the cointegration results on the effects of exchange rate and its volatility on trade flows, the short-run elasticities are smaller than the corresponding long- run elasticities.