ABSTRACT

It is generally argued that the set of underlying forces behind North America’s economic integration will evolve over time. The North American Free Trade Agreement (NAFTA) clearly sped up two key interactions: trade and investment (Reyes-Heroles 2004: 395). One of the effects of such greater involvement of market actors (especially the financial and banking sectors) in each other’s countries is that NAFTA has led to a broader range of cross-border activities and transactions than before it was adopted (Lucio 1999: 194). The resulting macroeconomic and price convergence in North America provides a favorable context for prudent fiscal and monetary policies, making further, especially monetary and fiscal, integration necessary (Reyes-Heroles 2004: 398). The discussions on monetary integration in NAFTA and corresponding empirical observations during the 1994 Mexican currency crisis, as well as the adaptation of US monetary policy standards by Mexico, led to a debate about political harmonization in an evolving North American economic integration. As there is no agenda for leading NAFTA toward a currency union or implementing an exchange rate mechanism to cope with spillovers, 1 the question of unintended effects of NAFTA matters.