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"Inflation targeting Mexico."
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Inflation targeting and policy rules : the case of Mexico, 2001-2012
\"Inflation Targeting and Policy Rules is an essential book for understanding how Mexico's monetary policy has been evolving and functioning, from the beginning of the century to recent, highlighting the doctrine of policy rules and the implementation of inflation targeting framework, both fundamental elements necessary to comprehend the operation of the main central banks of the world. The book is valuable because of its theoretical and empirical treatment applied to the policy rules and to inflation targeting, which range from their origin, criticism, development, controversies, evolution, and evaluation of the subject. It is accessible reading for anyone interested in approaching the subject of the monetary policy of a developing country. It is, without a doubt, a relevant addition to the bank of knowledge on the monetary reality of any country that has recently adopted inflation targeting approach and which uses interest rate as instrument of policy, as well as the flexible currency exchange regimen. It will become an essential source for future investigations in Mexico and other countries in similar situations. The book explains the analytical framework that consists of developing conditional probability as essential for rational expectations hypothesis; presents a synthetic but detailed exposure of the approach of inflation targeting, especially based on the consensus among monetary authorities in the pursuit of low and stable inflation, detailing some of the most relevant experiences as well as their main objections; reviews the process origin-evolution of monetary policy rules; assesses the actions of the Banco de México in terms of the implementation of the inflation targeting approach; summarizes the highlights of Mexico's monetary policy and offers conclusions. The book is suitable for macroeconomics courses and courses dealing with developing economies as well as for financial professionals seeking recent and trends.\"-- Provided by publisher.
Book
Impact of sub-national synchronization on the behavior of national business cycles in emerging economies with inflation targeting
PurposeThe purpose of this paper is to assess sub-national business cycle (BC) synchronization's impact on national cycles in four emerging markets economies with inflation targeting (IT-EMEs): Brazil, Colombia, South Korea and Mexico.Design/methodology/approachThe authors use panel data models with fixed-effects and distributed lags.FindingsThe authors disclosed that sub-national synchronization increased national cycle amplitudes during expansion and recession phases. The authors also noticed that South Korea exhibited a more pronounced effect compared to Latin American countries, and this seemed to be associated with differences in the homogeneity of the production structures in the regions of these countries.Research limitations/implicationsThe authors cautioned that contrasting the findings with prior research on the effects of regional BC synchronization in IT-EMEs or with studies in different geographical contexts, is not possible due to the absence of prior research endeavors with this specific focus.Originality/valueThis study constitutes a first attempt to explain the impact of subnational cycle synchronization on the magnitude of national cycles in four IT-EMEs.
Journal Article
The Financial Conditions Index as an additional tool for policy-makers in developing countries: the Mexican case
PurposeThe idea of this study is to provide a solid Financial Condition Index (FCI) that allows the monetary transmission policy to be monitored in a country which in recent decades has suffered from major financial and monetary crises.Design/methodology/approachThe authors construct three FCIs for Mexico to analyse the role of financial asset prices in formulating monetary policy under an inflation-targeting regime. Using monthly data from 1995 to 2017, the authors estimate FCIs with two different methodologies and build the index by taking into account the mechanism of transmission of monetary policy and incorporating the most relevant financial variables.FindingsThis study’s results show that, likewise for developing countries as Mexico, an FCI could be a useful tool for managing monetary policy in reducing macroeconomic fluctuations.Originality/valueApart from building a predictor of possible financial stress, the authors construct an FCI for a central bank that pursues inflation targeting and to analyse the role of financial asset prices in formulating monetary policy.HighlightsWe construct three FCIs for Mexico to analyse the role of financial asset prices in formulating monetary policy under an inflation-targeting regime.The FCIs are based on (1) a vector autoregression model (VAR); (2) an autoregressive distributed lag model (ARDL) and (3) a factor-augmented vector autoregression model (FAVAR).FCI could become a new target for monetary policy within a hybrid inflation-targeting framework.FCI could be a good tool for managing monetary policy in developing countries with a low-inflation environment.
Journal Article
Inflation Targeting Matters: Evidence from OECD Economies' Sacrifice Ratios
Using data from OECD economies, we show that inflation targeters suffered smaller output losses during disinflations when compared to nontargeters. We also study why some countries choose to inflation target while others do not and find that higher average inflation and smaller debt levels render the adoption of the regime more likely. Applying Heckman's procedure to control for selection bias does not alter the link between inflation targeting and less costly disinflations.
Journal Article
Inflation Targeting and Inflation Risk in Latin America
We analyzed the effects of inflation targeting (IT) implementation and functioning through the reaction function of monetary authorities from Latin American (LA) inflation targeters (ITers), e.g. Brazil, Chile, Colombia, Mexico, and Peru. We adapted the Value-at-Risk (VaR) and CoVaR to the Inflation-at-Risk (
) and Co-Inflation-at-Risk (
), respectively, to estimate the inflation at the extremes of its probability density functions. The results suggested that the IT was able to reduce inflation risk for all ITers. Chile and Peru are further ahead in terms of inflationary control, whereas in Brazil, it is more difficult. We propose the IaR and CoIaR as additional risk-management tools.
Journal Article
The long-run interrelationship between exchange rate and interest rate: the case of Mexico
Purpose
The purpose of this paper is to analyse the long-term nature of the interrelationship between interest rate and exchange rate.
Design/methodology/approach
By employing Mexican data, the authors estimate a non-linear autoregressive distributed lags (NARDL) model to investigate the nature of the changes and the interaction between interest rate and exchange rate in response to monetary authorities’ actions.
Findings
The results show that, contrary to simplistic predictions, the real exchange rate causes the real interest rate in an asymmetric way. The bounds testing approach of the NARDL models suggests the presence of co-integration among the variables and the exchange rate variations appear to have significant long-run effects on the interest rate. Most importantly, these effects are asymmetric and positive variations in the exchange rate have a lower impact on the interest rate. It is also interesting to report that the reverse is not true: the interest rate in the long-run exerts no statistical significant impact on the exchange rate.
Practical implications
The asymmetric long-term relationship between real exchange rate and real interest rate is evidence of why monetary authorities are reluctant to free float exchange rate. In Mexico, as in most developing countries, monetary policy strongly responds to exchange rate movements because these have relevant effects on commercial trade. Moreover, in dollarized economies these effects are stronger because of pass-through impacts to inflation, income distribution and balance-sheet equilibrium (the well-known “original sin”).
Originality/value
Under inflation targeting and flexible exchange rate regime, despite central banks pursue the control of short-term interest rate, in the long-run one could observe that it is the exchange rate that influences the interest rate, and that this reverse causality is stronger in emerging economies. This paper contributes by analysing the asymmetric relationship between the variables.
Journal Article
Fighting inflation in Mexico: Theory and evidence
Mexico adopted the inflation targeting strategy in 2002, and this came together with declining inflation. According to the economic authorities, this also brought about lower pass-through of exchange rate changes into inflation. The objective of this article is to test the main hypotheses of Mexico's prize-stabilization strategy. As a preliminary step, we show evidence whereby the interest rate has not the impact on demand assumed in the conventional view. We then estimate econometric models, which show first of all that inflation depends essentially on the evolution of labor and input costs. Then we demonstrate that higher employment and higher wages associated with higher output do not necessarily entail higher labor costs because productivity also increases when output rises. In the final section, we set forth our main conclusions, which cast doubts on some crucial aspects of the inflation targeting strategy, and propose a different interpretation about why inflation declined in this country.
Journal Article
Agricultural subsidies: cutting into forest conservation?
We examine how agricultural subsidies may induce deforestation and interact with conservation programs by analyzing two large-scale national programs in Mexico that have existed simultaneously for more than a decade: an agricultural subsidy for livestock (PROGAN) and a program of payments for ecosystem services (PES). Looking across the entire Mexican landscape, we exploit the surprises in the timing of enrollment in PROGAN's waves, fluctuations in program payments, and the change in the value of the subsidy induced by inflation and currency fluctuations to identify the impacts of the livestock subsidy on environmental outcomes. We find that PROGAN increased municipal deforestation by 7 per cent. The deforestation effects of PROGAN were smaller in municipalities with higher concentrations of PES recipients. We suggest that livestock subsidies could be better targeted to places with low deforestation risk and high livestock productivity to maximize food production and minimize negative externalities caused by deforestation.
Journal Article
Macroeconomic effects of high interest rate policy: Mexico’s experience
We study the effects of the high interest rate policy implemented in Mexico under the inflation targeting (IT) scheme on the price level and on GDP and its components. We specify a macroeconomic model inspired by the theory of the effective demand, and on this basis we demonstrate, through comparative statics, the complex set of relationships between the variables involved, and the chain of reactions that a shock to the interest rate is likely to provoke. Our main conclusions show that an interest rate rise may be instrumental to control inflation. However, this rise contributes to appreciate the exchange rate, which is the main channel through which inflation is tamed. Currency appreciation raises the share of wages in GDP even as it reduces the debt service of firms indebted in dollars. It follows that the interest rate rise may have, under certain conditions, an indirect positive impact on output. Thus, our results diverge from those entailed by the theory that is at the basis of the inflation-targeting strategy, and even from some contemporary non-conventional approaches.
Journal Article
Monetary Policy and Inflation Expectations in Latin America: Long-Run Effects and Volatility Spillovers
This paper uses multiple cointegration analysis to estimate simultaneously a monetary reaction function and the determinants of expected inflation for Brazil, Chile, Colombia, and Mexico. In addition, M-GARCH modeling is used to test for the presence of volatility spillovers between the monetary stance and inflation expectations. The analysis shows that there are long-term relationships between the interest rate, expected inflation, and the inflation target, and that greater volatility in the monetary stance increases the volatility of expected inflation in Brazil, Colombia, and Mexico.
Journal Article