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Monetary policy rules in a small open economy: an application to Mexico

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Abstract

We estimate a small-scale macro model for the Mexican economy under the New Keynesian (NK) framework and alternative interest rate rules for Mexico. With these results we evaluate the performance of the Bank of Mexico against a set of optimality principles derived in the NK literature. Our system estimation results show that the Bank of Mexico holds a preference for stabilizing not only inflation around target, but also acts to achieve an output gap close to zero. Furthermore, we find that the central bank responds non-linearly to real exchange rate depreciations. We also find that the central bank has actively attempted to neutralize demand and supply shocks through monetary policy that is consistent with the Taylor principle.

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File URL: http://www.ucema.edu.ar/publicaciones/download/volume15/cermeno.pdf
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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): XV (2012)
Issue (Month): (November)
Pages: 259-286

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Handle: RePEc:cem:jaecon:v:15:y:2012:n:2:p:259-286

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Keywords: Taylor Rule; New Keynesian; monetary policy; interest rate rules; small open economy;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Política Monetaria en México y Reglas de Taylor
    by Alejandro Villagomez in Tintero Económico Diario on 2012-11-22 00:07:00
  2. Banxico y la Posible Reducción en su Tasa de Referencia
    by Alejandro Villagomez in Tintero Económico Diario on 2013-03-08 02:40:00
  3. Entendiendo la Decisión de Banxico
    by Alejandro Villagomez in Tintero Económico Diario on 2014-02-01 00:39:00
  4. Banxico reduce su Tasa a 3%: ¿Medida Correcta, Oportuna y Efectiva?
    by Alejandro Villagomez in Tintero Económico Diario on 2014-06-07 14:27:00
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Cited by:
  1. Villarreal, Francisco G., 2014. "Monetary Policy and Inequality in Mexico," MPRA Paper 57074, University Library of Munich, Germany.

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