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Reducing Inflation Through Inflation Targeting: The Mexican Experience

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  • Manuel Ramos Francia
  • Alberto Torres García
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    Abstract

    This paper reviews the role of monetary policy in the disinflation process that has taken place in the Mexican economy in recent years. The purpose is to show that, once an economy establishes a sustainable fiscal position, an inflation targeting framework can be seen as an efficient mechanism to impose discipline on monetary policy and, thus, to reduce inflation. This paper describes the measures that were taken after the 1995 crisis to stabilize the economy and that prevented the possibility of a fiscal dominance situation from arising. Consequently, the role of monetary policy in reducing inflation is analyzed, in particular its response to different inflationary shocks. Results show that in conducting the successful disinflationary process, Banco de México's responses to inflationary shocks have been consistent with inflation targeting principles.

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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B8D174272-9EB2-18C4-53DE-13865BF1982D%7D.pdf
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    Bibliographic Info

    Paper provided by Banco de México in its series Working Papers with number 2005-01.

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    Date of creation: Jul 2005
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    Handle: RePEc:bdm:wpaper:2005-01

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    Web page: http://www.banxico.org.mx
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    Related research

    Keywords: inflation targeting; inflation reduction; monetary policy;

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    References

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    1. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
    2. Richard Clarida & Jordi Gali, 1994. "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?," NBER Working Papers 4658, National Bureau of Economic Research, Inc.
    3. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
    4. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
    5. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
    6. Kenneth N. Kuttner & Adam S. Posen, 1999. "Does talk matter after all? Inflation targeting and central bank behavior," Staff Reports 88, Federal Reserve Bank of New York.
    7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    8. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
    9. Romer, Christina D. & Romer, David H., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Department of Economics, Working Paper Series qt5h07k8vf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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    Cited by:
    1. Tiwari, Aviral Kumar & Suresh K.G., & Arouri, Mohamed & Teulon, Frédéric, 2014. "Causality between consumer price and producer price: Evidence from Mexico," Economic Modelling, Elsevier, vol. 36(C), pages 432-440.
    2. Carla Ysusi, 2009. "Analysis of the Dynamics of Mexican Inflation Using Wavelets," Working Papers 2009-09, Banco de México.
    3. José J. Sidaoui & Manuel Ramos-Francia, 2008. "The monetary transmission mechanism in Mexico: recent developments," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 363-394 Bank for International Settlements.
    4. Carla Ysusi, 2010. "Consumer Price Behavior in Mexico Under Inflation Targeting: A Microdata Approach," Working Papers 2010-09, Banco de México.
    5. Ramos-Francia, Manuel & Torres, Alberto, 2008. "Inflation dynamics in Mexico: A characterization using the New Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 19(3), pages 274-289, December.
    6. Manuel Ramos Francia & Alberto Torres García, 2006. "Inflation Dynamics in Mexico: A Characterization Using the New Phillips Curve," Working Papers 2006-15, Banco de México.

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