Abstract
The central argument of this paper is that in pursuing low inflation as its single and exclusive goal, and given some characteristics of the Mexican economy – a large degree of trade openness, a relatively high pass through of exchange rate movements into prices, and a low direct sensitivity of aggregate demand to interest rates – monetary policy has generated a recurrent tendency toward real exchange rate appreciation with very adverse effects on economic growth. The paper also examines central bank’s intervention in the foreign exchange market and the effectiveness of sterilized intervention in affecting the real exchange rate and potentially overcoming the tendency to real appreciation.
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