Monetary policy in liberalized financial markets: the Mexican case*

Abstract

The paper examines the behavior of monetary policy and the institutional organization of economic policy in Mexico during the years of financial liberalization and the outgrowth of the financial industry. It argues that these policies have favored monetary and financial stability at the cost of reducing investment and negatively affecting the strength of the productive structure and the international competitiveness of the economy. The paper argues that such negative results, with the passage of time, increase the odds that current monetary policy will become unable to pursue monetary and financial stability. Unlike other outstanding critical literature, the emphasis of our evaluation regarding current policy's negative consequences is on the reduction of public investment that the institutional organization of economic policy has produced, instead of the overvaluation of the real exchange rate. As a final point, the paper discusses how institutional organization can be reformed to avoid further weakening of the productive structure and international competitiveness of the Mexican economy.