IDEAS home Printed from https://ideas.repec.org/a/gam/jecomi/v13y2025i3p82-d1616165.html

Monetary Policy Adjustments in Mexico During COVID-19: Fear of Floating and Macroeconomic Volatility

Author

Listed:
  • Jesús Eduardo López-Mares

    (Facultad de Economía y Relaciones Internacionales, Universidad Autónoma de Baja California, Tijuana 22427, Baja California, Mexico)

  • Juan Manuel Ocegueda-Hernández

    (Facultad de Economía y Relaciones Internacionales, Universidad Autónoma de Baja California, Tijuana 22427, Baja California, Mexico)

  • Rogelio Varela-Llamas

    (Facultad de Economía y Relaciones Internacionales, Universidad Autónoma de Baja California, Tijuana 22427, Baja California, Mexico)

Abstract

The aim of this paper is to investigate how the central bank of Mexico—a prototypical emerging market economy (EME)—adjusted its reaction coefficients according to an estimated Taylor-type rule in response to the COVID-19 pandemic and the posterior surge in inflation. To do so, we estimate a small open economy model and employ Bayesian methods with a rolling window strategy. Our findings suggest that, during and after the COVID-19 crisis, the central bank slightly reduced its response to inflation and significantly decreased the reaction to the output gap. Further, the exchange rate response increased, pointing to a higher fear of floating. Additionally, a counterfactual experiment shows that these policy adjustments effectively dampened the macroeconomic volatility during the pandemic. We attribute these changes to the lower sensitivity of inflation to the output gap and the amplification of external shocks. However, we argue that these adjustments, particularly the heightened fear of floating, are temporary measures designed to anchor inflation expectations.

Suggested Citation

  • Jesús Eduardo López-Mares & Juan Manuel Ocegueda-Hernández & Rogelio Varela-Llamas, 2025. "Monetary Policy Adjustments in Mexico During COVID-19: Fear of Floating and Macroeconomic Volatility," Economies, MDPI, vol. 13(3), pages 1-15, March.
    • Handle: RePEc:gam:jecomi:v:13:y:2025:i:3:p:82-:d:1616165
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7099/13/3/82/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7099/13/3/82/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hale, Galina & Juvenal, Luciana, 2023. "External Balance Sheets and the COVID-19 Crisis," Journal of Banking & Finance, Elsevier, vol. 147(C).
    2. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1069-1087, May.
    3. Alejandro Justiniano & Giorgio E. Primiceri, 2008. "The Time-Varying Volatility of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 98(3), pages 604-641, June.
    4. El-Shagi, Makram & Ma, Yishuo, 2023. "Taylor rules around the world: Mapping monetary policy," Economics Letters, Elsevier, vol. 232(C).
    5. Sebastian Heise & Fatih Karahan & Ayşegül Şahin, 2022. "The Missing Inflation Puzzle: The Role of the Wage‐Price Pass‐Through," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(S1), pages 7-51, February.
    6. Serletis, Apostolos & Dery, Cosmas, 2025. "Monetary policy in advanced and emerging economies," Macroeconomic Dynamics, Cambridge University Press, vol. 29, pages 1-1, January.
    7. Yu Chen & Apostolos Serletis, 2025. "Monetary Policy Strategies in Advanced and Emerging Economies," Open Economies Review, Springer, vol. 36(1), pages 1-23, February.
    8. Binder, Carola & Ozturk, Ezgi & Sheng, Xuguang Simon, 2025. "The effects of inflation uncertainty on firms and the macroeconomy," Journal of International Money and Finance, Elsevier, vol. 151(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sebasti√°n Cadavid S√°nchez, 2018. "Monetary policy and structural changes in Colombia, 1990-2016: A Markov Switching approach," Documentos CEDE 16970, Universidad de los Andes, Facultad de Economía, CEDE.
    2. Boris Blagov, 2018. "Financial crises and time-varying risk premia in a small open economy: a Markov-switching DSGE model for Estonia," Empirical Economics, Springer, vol. 54(3), pages 1017-1060, May.
    3. Özer Karagedikli & Troy Matheson & Christie Smith & Shaun P. Vahey, 2010. "RBCs AND DSGEs: THE COMPUTATIONAL APPROACH TO BUSINESS CYCLE THEORY AND EVIDENCE," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 113-136, February.
    4. Zhang, Bo & Dai, Wei, 2020. "Trend inflation and macroeconomic stability in a small open economy," Economic Modelling, Elsevier, vol. 91(C), pages 769-778.
    5. Cúrdia, Vasco & Finocchiaro, Daria, 2013. "Monetary regime change and business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 37(4), pages 756-773.
    6. Sameeh Alqaralleh, Huthaifa & Canepa, Alessandra & Muchova, Eva, 2025. "Inflation synchronization and shock transmission between the eurozone and the non-euro CEE Economies: A wavelet quantile VAR approach," The North American Journal of Economics and Finance, Elsevier, vol. 76(C).
    7. Alex, Dony, 2025. "Inflation targeting and the changing transmission mechanism of monetary policy in India," Economic Modelling, Elsevier, vol. 151(C).
    8. Xiaoshan Chen & Ronald Macdonald, 2012. "Realized and Optimal Monetary Policy Rules in an Estimated Markov‐Switching DSGE Model of the United Kingdom," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1091-1116, September.
    9. Danny Hermawan Adiwibowo & Aryo Sasongko & Denny Lie, 2022. "Money Velocity, Digital Currency, And Inflation Dynamics," Working Papers WP/13/2022, Bank Indonesia.
    10. Basso, Henrique S. & Rachedi, Omar, 2025. "Robot adoption and inflation dynamics," Journal of Monetary Economics, Elsevier, vol. 156(C).
    11. Cross, Jamie & Kam, Timothy & Poon, Aubrey, 2025. "Volatility shocks in markets and policies: What matters for a small open economy like Canada?," Economic Modelling, Elsevier, vol. 151(C).
    12. Ma, Wei & Zhang, Renzhong & Han, Liyan & Li, Wei, 2025. "Divergent relationships between exchange rate pass-through and policy rates across economies: An extension of the Taylor rule," Finance Research Letters, Elsevier, vol. 71(C).
    13. Luca Guerrieri & Dale Henderson & Jinill Kim, 2014. "Modeling Investment‐Sector Efficiency Shocks: When Does Disaggregation Matter?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(3), pages 891-917, August.
    14. Muellbauer, John & Sinclair, Peter & Aron, Janine & Farrell, Greg, 2010. "Exchange Rate Pass-through and Monetary Policy in South Africa," CEPR Discussion Papers 8153, Centre for Economic Policy Research.
    15. Murray, James, 2014. "Fiscal Policy Uncertainty and Its Macroeconomic Consequences," MPRA Paper 57409, University Library of Munich, Germany.
    16. Carlos Medel, 2017. "Forecasting Chilean inflation with the hybrid new keynesian Phillips curve: globalisation, combination, and accuracy," Journal Econom a Chilena (The Chilean Economy), Central Bank of Chile, vol. 20(3), pages 004-050, December.
    17. Barthélemy, Jean & Marx, Magali, 2017. "Solving endogenous regime switching models," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 1-25.
    18. Eschenhof, Sabine, 2009. "Standard Taylor rules revisited: A cross country study for European countries," Darmstadt Discussion Papers in Economics 196, Darmstadt University of Technology, Department of Law and Economics.
    19. Caraiani, Petre, 2013. "Comparing monetary policy rules in CEE economies: A Bayesian approach," Economic Modelling, Elsevier, vol. 32(C), pages 233-246.
    20. Yang Liu & Mariano Croce & Ivan Shaliastovich & Ric Colacito, 2016. "Volatility Risk Pass-Through," 2016 Meeting Papers 135, Society for Economic Dynamics.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jecomi:v:13:y:2025:i:3:p:82-:d:1616165. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager The email address of this maintainer does not seem to be valid anymore. Please ask MDPI Indexing Manager to update the entry or send us the correct address (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.