| Abstract: | This paper investigates the effect of trade liberalization on the exchange rate passthrough (ERPT) to import prices. To do so, it employs an empirical estimation of the effects of North American Free Trade Agreement (NAFTA) on the Mexican ERPT, and uses a Ricardian general equilibrium model. The model identifies two channels that explain how the trade liberalization alters the ERPT. The first channel is the direct relationship between the tariffs and the pass‐through by good. The second channel is the effect that tariffs have on the composition of imports, altering indirectly the aggregate pass‐through. |
