Monetary Policy Convergence in the NAFTA Region: Evidence from Cointegration Analysis and Contagion Effects

Lizardo, Radhames
Kelly, Mary H.
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This paper examines the evolving, time-variant, long-run equilibrium relationship among the target interbank interest rates of Canada, the United States and Mexico to assess whether or not monetary policy in the NAFTA region is truly converging, as suggested by the leaders of these countries at a recent meeting in Montebello, Canada. Only recently has is it become feasible to analyze monetary convergence in the NAFTA region, as rolling cointegration analysis requires long-term data, such as that used in this study for the period of 1997 through 2007. We also test for cross-border contagion effects from the financial difficulties faced by Countrywide Financial Corporation during the recent U.S. real estate meltdown. This study of empirical financial and economic phenomena employs multivariate cointegration test and, for robustness, calculates σ-convergence in the NAFTA region. Our findings support the hypothesis of monetary policy convergence in the region. In general, the analysis tends to confirm a broad, ongoing economic convergence in the NAFTA region. We also find support for the proposition of cross border contagion effects from the financial difficulties faced by Countrywide, which adds robustness to the presence of monetary convergence.
Lizardo, R. A, & Kelly, M. (2013). Monetary policy convergence in the NAFTA region: Evidence from cointegration analysis and contagion effects. Business Studies Journal, 5(1), 1-18.