Policy decisions taken
by the Federal Open Market Committee (FOMC) does affect individuals who live in
border towns such as Laredo, TX. The end of QE would appreciate the U.S. dollar
against the Mexican peso ceteris paribus and, then, affect both the
inflow of cross-border shoppers from Mexico as well as U.S. exports to Mexico. Thus,
the end of QE would negatively affect local economies along the U.S.-Mexico
border through both retail trade sector and transportation and
warehousing sector.
Starting on December
2008, the Federal Reserve engaged in several rounds of QE—including Operation
Twist—in order to expand the U.S. economy. The last round ended on October 29th,
2014. QE refers to the Fed increasing its purchases of long-term U.S. sovereign
debt and mortgage-backed securities (MBS) on a monthly basis. (Figure 1 shows
the Fed’s monthly holdings of U.S. Treasury securities, from January 2004 to
October 2014. Figure 2, on the other hand, shows the Fed’s monthly holdings of
MBS, from January 2009 to October 2014; these were zero prior to 2009.) As a result,
the price of the assets bought by the Fed increased. Alternatively, QE had the
effect of keeping at low levels the return paid by U.S. securities. (Figure 3
shows the monthly yield on 10 year Treasury bonds, from January 2004 to
September 2014.) Investors, then, seek to maintain the return on their
investment portfolio by purchasing foreign securities that paid higher returns
than U.S. securities. (Figure 4 compares the monthly yield on 10 year bonds
issued by the U.S. and the Mexican governments. Figure 5, then, shows the
quarterly holdings of international securities denominated in Mexican pesos,
from 2004-Q1 to 2014-Q2. Similarly, Figure 6 shows daily holdings—in current
Mexican pesos—of all forms of Mexico sovereign debt instruments by non-Mexico
residents as well as the corresponding share out of total Mexico sovereign
debt.) Therefore, the demand for the U.S. dollar relative to other currencies
decreased, thus, causing its depreciation.
The value of the U.S.
dollar relative to other currencies was kept relatively low partly because of
QE. (Figure 7 shows the monthly exchange rate between the U.S. dollars and the
Mexican peso, from January 2004 to October 2014.) The end of QE, in contrast,
would cause the appreciation of the dollar. That is, investors would rebalance
their portfolio by purchasing more U.S. securities as the returns these pay
increase due to the end of QE, which would thus increase the demand for the
U.S. dollar relative to other currencies, resulting in its appreciation.
Indeed, the U.S. dollar
has been appreciating against the Mexican peso for the past three months,
because investors had expected the end of QE to occur during the FOMC meeting
that concluded on September 17, 2014. Although the appreciation of the U.S.
dollar against the Mexican peso may be offset by the other factors, like an
inflow of foreign investment to Mexico as a result of its energy reform, it
remains correct that the end of QE has the effect of appreciating the U.S.
dollar ceteris paribus.
U.S. products become
more expensive to Mexican customers as the U.S. dollar appreciates against the
Mexican peso. The flow of Mexican cross-border shoppers to retail stores in
border towns, therefore, is expected to shrink. Likewise, the flow of U.S.
exports to Mexico is expected to contract, which in turn would reduce the
activity in the transportation and warehousing sector in border towns. These
two sectors are very important for local economies along the U.S.-Mexico
border.
In 2013, the retail
sector represented 5.6 percent of the U.S. metropolitan portion GDP—i.e.,
includes all 382 metropolitan statistical areas in the U.S., except for those
in Puerto Rico. In contrast, the following are the corresponding figures for
selected metropolitan statistical areas (MSAs) along the U.S.-Mexico border: Brownsville-Harlingen
(TX), 10.7 percent; El Paso (TX), 8.1 percent; Laredo (TX), 9.2 percent;
McAllen-Edinburg-Mission (TX), 12.0 percent. Indeed, out of the 382 MSAs, McAllen-Edinburg-Mission
(TX) ranked as the third MSA with the highest GDP contribution from the retail
trade sector; Brownsville-Harlingen (TX) ranked tenth; Laredo (TX) ranked
thirty-sixth.
The same pattern is observed
in the case of the transportation and warehousing sector. This sector
contributed 2.9 percent of the U.S. metropolitan portion GDP in 2013. For the
selected MSAs, this figure follows: Brownsville-Harlingen (TX), 4.6 percent; El
Paso (TX), not available; Laredo (TX), 13.0 percent; McAllen-Edinburg-Mission
(TX), 5.3 percent. In particular, Laredo (TX) ranked as the second MSA with the
highest GDP contribution from the transportation sector; McAllen-Edinburg-Mission
(TX) ranked twenty-fourth; Brownsville-Harlingen (TX) ranked forty-fourth.
In sum, the appreciation
of the U.S. dollar against the Mexican peso would result from the end of quantitative
easing, which in turn would reduce U.S. exports to Mexico. Towns on the
U.S.-Mexico border, however, would be further impacted by the appreciation of
the U.S. dollar, because it would reduce the activity in two relevant sectors
to them, retail trade and transportation and warehousing. Towns along the U.S.-Mexico
border town, from a different perspective, benefited from quantitative easing
and now that benefit has ceased.
Figure 1
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
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