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The Inflation-Output Volatility Tradeoff and Exchange Rate Shocks in Mexico and Turkey

Author

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  • Alfonso Mendoza V.

Abstract

Using a standard Vector Autorregresion with Autocorrelated Time Varying Covariances this paper finds evidence of a vertical inflation-output volatility tradeoff in Mexico and Turkey. It is found, contrary to common economic wisdom, that there is no tradeoff between output and inflation so that monetary policy affects only prices. In addition, it is observed that the exchange rate crucially affects the dynamics of prices, inflation and output. The pass-through from exchange rate to inflation is high and significant in both economies and periods of high exchange rate volatility are associated with unstable rates of inflation. Also, in agreement with many other studies, it is shown here that nominal depreciations are contractionary.

Suggested Citation

  • Alfonso Mendoza V., 2003. "The Inflation-Output Volatility Tradeoff and Exchange Rate Shocks in Mexico and Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 3(1), pages 27-51.
    • Handle: RePEc:tcb:cebare:v:3:y:2003:i:1:p:27-51
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    References listed on IDEAS

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    Cited by:

    1. Islas-Camargo, Alejandro & Cortez, Willy W., 2011. "How relevant is monetary policy to explain Mexican unemployment fluctuations?," MPRA Paper 30027, University Library of Munich, Germany.
    2. Sharif, Bushra & Qayyum, Abdul, 2018. "Estimating the Inflation-Output Gap Trade-Off with Triangle Model in Pakistan," MPRA Paper 91166, University Library of Munich, Germany.
    3. Alejandro Rodríguez Arana, 2019. "Limited Information and the Relation Between the Variance of Inflation and the Variance of Output in a New Keynesian," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 14(PNEA), pages 541-557, Agosto 20.

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    More about this item

    Keywords

    Inflation-output Tradeoff; Exchange Rates; BEKK Models;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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