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Alternatives to inflation targeting in Mexico

Author

Listed:
  • Luis Miguel Galindo
  • Jaime Ros

Abstract

The paper addresses Mexico's experience with inflation targeting, which became operational in the aftermath of the 1994/95 tequila crisis. Using VAR econometrics over the post-1980 time series data, we find that monetary policy of the Banco de Mexico was asymmetric with respect to exchange rate movements - tightening when exchange rates depreciated, but not loosening when exchange rates appreciated. This lent a bias in favor of an over-valued exchange rate, leading to contractionary effects on output. We propose a more 'neutral' monetary policy so that the central bank of Mexico responds symmetrically to real exchange rate movements and thereby avoids the bias toward over-valuation. This policy may continue to be implemented within the boundaries of inflation targeting wherein the central bank would promote a 'stable and competitive' real exchange rate by establishing a sliding floor to the exchange rate in order to prevent excessive appreciation, but by allowing it to float freely otherwise.

Suggested Citation

  • Luis Miguel Galindo & Jaime Ros, 2008. "Alternatives to inflation targeting in Mexico," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(2), pages 201-214.
    • Handle: RePEc:taf:irapec:v:22:y:2008:i:2:p:201-214
    DOI: 10.1080/02692170701880718
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    References listed on IDEAS

    as
    1. Mr. Chorng-Huey Wong & Mr. Eric V. Clifton & Mr. Gene L. Leon, 2001. "Inflation Targeting and the Unemployment-Inflation Trade-off," IMF Working Papers 2001/166, International Monetary Fund.
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