Monetary Policy In Mexico Research Articles

Global supply chain inflationary pressures and monetary policy in Mexico

In this paper, we examine the impact of stress in the global supply chains on inflation and monetary policy in Mexico, a representative emerging market economy. Using non-linear local projections, we estimate the degree of monetary policy tightening required in a high-stress supply chain environment and compare it to that in a low-stress environment. We instrument the monetary policy shocks with shocks to the federal funds rate. Results suggest that in a high-stress regime, the effect of an increase in the monetary policy interest rate on inflation over a one-year period is reduced considerably. We argue that this reduction is due to the slow response of inflation expectations to a monetary policy tightening in a high-stress regime. Furthermore, raising the interest rate has an effect on producer price inflation, a channel that is absent in a low-stress regime. This finding highlights the role of monetary policy in stabilizing inflation when facing supply shocks that are not necessarily permanent.

Does the Exchange Rate Respond to Monetary Policy in Mexico? Solving an Exchange Rate Puzzle in Emerging Markets

AbstractThis paper argues that the null or weak response of emerging market currencies to domestic monetary policy documented in the literature is the result of wide event windows. An event study with intraday data for Mexico shows that an unanticipated tightening appreciates the currency and flattens the yield curve, consistent with the evidence for advanced economies. With daily event windows, however, only the yield curve responds to monetary policy. Noise in daily exchange rate returns explains the lack of response of the currency. Such noise gives rise to a bias that declines after controlling for potential omitted variables.

TIIE-28 Swaps as Risk-Adjusted Forecasts of Monetary Policy in Mexico

Information extracted from financial derivatives on interest rates is commonly used to forecast movements in interest rates. However, such an extraction generally assumes that agents are risk-neutral, which is not necessarily the case. Accordingly, it might be useful to account for the agents’ risk-aversion when doing these forecasts, which one can implement by adding a risk-correction. In this context, we use TIIE-28 swaps to forecast changes in monetary policy in Mexico, using a set of financial variables to account for the risk-correction. We assess whether models with a risk-correction outperform the TIIE-28 swaps rates, and find that the in-sample explained variability improves when using a risk-correction. Centrally, we document that our main model’s out-of-sample forecasts are similar for short horizons (3-month), and statistically significantly better for longer horizons (9 to 24-month), compared to the direct use of TIIE-28 swaps interest rates.

How important is the credit channel in the transmission of monetary policy in Mexico?

ABSTRACTThis article empirically examines the importance of the credit channel of monetary policy in Mexico for the period 2004–2013. We estimate a vector autoregressive (VAR) model to analyse the effects of a monetary policy shock on real output, and we also use a threshold VAR model to investigate asymmetric effects of contractionary and expansionary policies. The empirical results suggest that a contractionary monetary policy results in a fall in the supply of loans together with an increase in the spread between the lending and deposit rate. To the extent that some borrowers are dependent on bank loans for credit, the reduced supply of loans amplifies the effects of monetary policy on output associated with the traditional interest rate channel. Our results also suggest that the importance of the credit channel is larger for contractionary shocks than for expansionary shocks.

Investment, asset market, and the relative unit labor cost in Mexico

The paper estimates equations for the Mexican/US manufacturing relative unit labor cost (RULC), and finds significant effects from asset market variables like interest rate differentials, foreign reserve accumulation, and international capital flows. The equations are motivated by a simple decomposition that reveals the roles played by relative manufacturing prices and real product wages—and hence the nominal exchange rate—in the upward trend of RULC. The paper follows to estimate equations for aggregate private investment in Mexico, finding a negative RULC effect that agrees with the recent literature on the real exchange rate’s profitability (or development) channel. All the estimations focus on long-run effects, applying the bounds testing approach to quarterly data from 1988 to 2013. The results imply that both the repeated surges in capital inflows and the disinflationary stance of monetary policy in Mexico contributed to the upward trend in RULC, which affected the country’s economic growth negatively by its depressing effect on investment.

Mexico's Monetary Policy Communication and Money Markets

Central bank communication is becoming a key aspect of monetary policy. How much financial markets listen and, possibly, understand Banco de Mexico's communication on its monetary policy stance should be a key consideration for the central bank to further modernize its monetary policy toolkit. In this paper, we tackle this issue empirically by using our own index of the tone of communication based on Banco de Mexico's speeches and statements and find that money markets do not only listen but they also understand the stance of monetary policy conveyed in the central bank's words. Regarding the ability to listen, first, we find that both the volatility and volume in the money market rates change right after communication from Banco de Mexico's governing body. As for the markets' understanding, we find a statistically significant rise in money market interbank rates the more hawkish communication is. All in all, our results show strong evidence of effective oral and written communication from the Central Bank towards Mexico's money markets.

Did the Bank of Mexico follow a systematic behaviour in its transition to an inflation targeting regime?

The main determinants of monetary policy in Mexico are analysed using conventional reaction functions to evaluate the gradual implementation of inflation targeting (IT) to achieve low and stable rates of inflation. In particular, we look at how the evolution of the inflation, growth and movements in exchange rates have conditioned the decisions of monetary policy taken by the central bank in Mexico for the period 1996 to 2010. Our results show in a systematic way that exchange-rate variations played a major role until 2000 (disinflation period) when IT was explicitly adopted and growth and inflation became the predominant variables with this new monetary regime. We conclude that IT in Mexico has effectively contributed to gain a nominal anchor for monetary policy.

Fear of floating or monetary policy as usual? A structural analysis of Mexico's monetary policy

This paper uses Bayesian methods to estimate a small open economy dynamic stochastic general equilibrium (DSGE) model for the period in Mexico after the 1994 crisis. I consider a Taylor rule as the expression of the evolution of monetary policy to gauge its response to the exchange rate in the post-crisis period. The estimation results favor a consistent response of the nominal interest rate to the short-run nominal exchange rate after 1994. Although fear of floating is present, Mexico's monetary policy has taken steps toward a credible free-floating exchange rate that targets inflation.

Monetary policy and macroeconomic stability in Latin America: The cases of Brazil, Chile, Colombia and Mexico

In 1999, new monetary policy regimes were adopted in Brazil, Chile, Colombia and Mexico, combining inflation targeting with floating exchange rates. These regime changes have been accompanied by lower volatility in the monetary stance in Brazil, Colombia and Mexico, despite higher inflation volatility in Brazil and Colombia. This paper estimates a conventional New Keynesian model for these four countries and shows that: i) the post-1999 regime has been associated with greater responsiveness by the monetary authority to changes in expected inflation in Brazil and Chile, while in Colombia and Mexico monetary policy has become less counter-cyclical, ii) lower interest-rate volatility in the post-1999 period owes more to a benign economic environment than to a change in the policy setting, and iii) the change in the monetary regime has not yet resulted in a reduction in output volatility in these countries.

Analysis of Monetary Policy in Mexico 1996-2007

Analysis of Monetary Policy in Mexico 1996-2007

Recursive Thick Modeling and the Choice of Monetary Policy in Mexico

The choice of monetary policy is the most important concern of central banks, but this choice is always confronted with two relevant aspects of economic policy: parameter instability and model uncertainty. This paper deals with both types of uncertainty and shows that recursive thick modeling is a better approximation to the recent historical nominal interest rates in Mexico than both recursive thin modeling and models with a low penalty on interest rate variability. We complement previous work by evaluating the usefulness of both recursive thick modeling and recursive thin modeling in terms of direction-of-change forecastability. The results show a policy maker who cares about inflation and output stabilization the same for downward movements in nominal interest rates. Furthermore, our results suggest a policy maker with a higher preference for inflation stabilization for upward movements in nominal interest rates.

Structural Changes in the Transmission Mechanism of Monetary Policy in Mexico: A Non-linear VAR Approach

In this paper we present a first approach to the study of the transformation in the transmission mechanism of monetary policy that has taken place in Mexico in recent years. For this purpose, we use a non-linear VAR model that allows for regime shifts. The comparison of the dierent regimes identified leads to the following main findings: a) there was a major structural change in the transmission mechanism around January 2001, date that coincides with the formal adoption of the inflation targeting framework; b) after this change, fluctuations in the real exchange rate have had smaller eects on the process of price formation, the formation of inflation expectations and the nominal interest rate; c) there have been stronger reactions of the nominal interest rate to increases in the output gap and the rate of inflation; and d) movements of the nominal interest rate have been more eective in influencing the

Monetary policy and interest rates: evidence from Mexico

Using the recent experience of Mexico under a flexible exchange-rate regime and under an inflation-targeting framework, this paper examines the extent to which monetary policy has performed the role of nominal anchor for the Mexican economy. The paper identifies a set of variables together with a monetary policy rule, which offer a good approximation to the process through which interest rates are determined. The evidence suggests that recent monetary policy in Mexico has been consistent with inflation-targeting principles and has become the nominal anchor for the economy.

The exchange rate and the term structure of interest rates in Mexico

Mexico adopted a floating exchange rate regime in December 1994. The Bank of Mexico's monetary policy gives attention to maintain “orderly conditions in foreign exchange markets.” The Bank of Mexico relies primarily on the control of the overnight interest rate in conducting its monetary policy. The question arises whether this extremely short-term interest rate is the relevant instrument to achieve exchange rate objectives. Theory suggests that the relationship between the exchange rate and the term structure of interest rates can be complicated and counterintuitive when investors are risk averse. In this paper, we pursue an empirical investigation on the effect of the term structure of interest rates on the exchange rate for Mexico. This information could be useful to understand and manage the operation of the Mexican floating exchange rate regime.

The adjustment of nominal interest rates in Mexico: a study of the Fisher effect

Evidence is presented in favour of a Fisher effect between treasury bill interest rates and inflation in Mexico between 1978–94. The two series appear to be cointegrated and a unit proportional relationship between them would appear to exist such that treasury bills rates respond fully to inflationary shocks over a period of about 12 months. As such, monetary policy in Mexico is unlikely to have much impact on real rates of interest over the long-run.

Foreign exchange and monetary policy in Mexico

The liberalization and reform of the Mexican economy has been headline material for several years. As Agustin Carstens explains in his article, one of the single most important factors in this turnaround has been sound fiscal policies and the recent moves to make the central bank independent. The foreign exchange rate policies and anti-inflation monetary policies have been the backbone of Banco de Mexico's efforts. These efforts, and their attendant effect upon Mexican financial markets serve as an illustration of current reform movements.