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The monetary transmission mechanism in Mexico

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  • Martina Copelman
  • Alejandro M. Werner
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    Abstract

    An important question in macroeconomics has been how the transmission mechanism of monetary policy works. In particular, the question of whether there exists a credit channel for the transmission of monetary policy has been one of the central themes in the discussion of the effectiveness of monetary policy. If this channel exists, then shocks to credit markets, particularly to bank loans, can have real effects. This paper presents new evidence on the credit hypothesis for the case of Mexico after 1984. We present a simple variant of the open economy IS-LM model which includes a credit channel. The model has the following empirical implications which are absent from models which do not include a credit channel. We show that changes in the expectations of devaluation, the desired cash/deposit ratio, and measures of financial deregulation, will have real effects because they change the quantity of credit available in the economy. We explore these implications of the model through standard VAR techniques and find that the evidence strongly supports the credit view. We find that the impact on economic activity of credit and nominal depreciation rate shocks is very significant.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/1995/521/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1995/521/ifdp521.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 521.

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    Date of creation: 1995
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    Handle: RePEc:fip:fedgif:521

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    Keywords: Mexico ; Monetary policy;

    References

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    1. Rudiger Dornbusch, 1981. "Real Interest Rates, Home Goods, and Optimal External Borrowing," NBER Working Papers 0779, National Bureau of Economic Research, Inc.
    2. Alan S. Blinder & Joseph E. Stiglitz, 1983. "Money, Credit Constraints, and Economic Activity," NBER Working Papers 1084, National Bureau of Economic Research, Inc.
    3. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
    4. Rudiger Dornbusch & Alejandro Werner, 1994. "Mexico: Stabilization, Reform, and No Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 253-316.
    5. Manmohan S. Kumar & Guillermo Calvo, 1994. "Money Demand, Bank Credit, and Economic Performance in Former Socialist Economies," IMF Working Papers 94/3, International Monetary Fund.
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    Cited by:
    1. Ahmed, Shaghil, 2003. "Sources of economic fluctuations in Latin America and implications for choice of exchange rate regimes," Journal of Development Economics, Elsevier, vol. 72(1), pages 181-202, October.
    2. Marco Del Negro & Francesc Obiols-Homs, 2000. "Has monetary policy been so bad that it is better to get rid of it? the case of Mexico," Working Paper 2000-26, Federal Reserve Bank of Atlanta.

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