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It takes two: Fiscal and monetary policy in Mexico

Author

Listed:
  • Ana Aguilar
  • Carlos Cantú
  • Claudia Ramírez

Abstract

We model the interaction between fiscal and monetary policy and qualify their effects in a semi-structural small open economy model calibrated for Mexico. In our model, fiscal and monetary policy follow rules tied to specific targets. We estimate how fiscal policy, through deficits and public debt accumulation, and monetary policy, through the interest rate, directly affect the economy. We study the nature of the feedback between policy decisions and examine their indirect effects through the sovereign risk channel. We find that the response of monetary policy to stabilise the economy after a shock depends on how strict is the fiscal rule. A loose fiscal stance pushes a tighter monetary policy stance. Instead, the economy recovers faster when monetary and fiscal policy complement each other.

Suggested Citation

  • Ana Aguilar & Carlos Cantú & Claudia Ramírez, 2022. "It takes two: Fiscal and monetary policy in Mexico," BIS Working Papers 1012, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1012
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    References listed on IDEAS

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    More about this item

    Keywords

    monetary policy; fiscal policy; sovereign risk premium; policy rules;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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