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Has monetary policy been so bad that it is better to get rid of it? The case of Mexico

  • Marco del Negro
  • Francesc Obiols-Homs

Motivated by the dollarization debate in Mexico, we estimate an identified vector autoregression for the Mexican economy using monthly data from 1976 to 1997, taking into account the changes in the monetary policy regime which occurred during this period. We find that 1) exogenous shocks to monetary policy have had no impact on output and prices, 2) most of the shocks originated in the foreign sector, 3) disturbances originating in the U.S. economy have been a more important source of fluctuations for Mexico than shocks to oil prices. We also study the endogenous response of domestic monetary policy by means of a counterfactual experiment. The results indicate that the response of monetary policy to foreign shocks played an important part in the 1994 crisis.

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Article provided by Federal Reserve Bank of Cleveland in its journal Proceedings.

Volume (Year): (2001)
Issue (Month): ()
Pages: 404-439

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Handle: RePEc:fip:fedcpr:y:2001:p:404-439
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  1. Uhlig, Harald, 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," CEPR Discussion Papers 2137, C.E.P.R. Discussion Papers.
  2. Guillermo A. Calvo & Enrique G. Mendoza, 1996. "Mexico's balance-of-payments crisis: a chronicle of death foretold," International Finance Discussion Papers 545, Board of Governors of the Federal Reserve System (U.S.).
  3. Christopher A. Sims & Tao Zha, 1994. "Error Bands for Impulse Responses," Cowles Foundation Discussion Papers 1085, Cowles Foundation for Research in Economics, Yale University.
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  7. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
  8. Christopher A. Sims, 1998. "Role of interest rate policy in the generation and propagation of business cycles: what has changed since the '30s?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 42(Jun), pages 121-175.
  9. Daniel F. Waggoner & Tao Zha, 1997. "Normalization, probability distribution, and impulse responses," Working Paper 97-11, Federal Reserve Bank of Atlanta.
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  13. Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "Stabilization Policy and the Costs of Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 482-509, May.
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  18. Gaetano Antinolfi & Elisabeth Huybens, 2004. "Domestic financial market frictions, unrestricted international capital flows, and crises in small open economies," Economic Theory, Springer, vol. 24(4), pages 811-837, November.
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  20. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," MPRA Paper 13843, University Library of Munich, Germany.
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  22. Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Working Papers 97-25, C.V. Starr Center for Applied Economics, New York University.
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