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Evaluation of the effectiveness of the interest rate and the exchange rate in defining monetary conditions in Mexico

Author

Listed:
  • Giovani Hasael Chavez Pina

    (Universidad Autonoma de Sinaloa. Mexico)

  • Irvin Mikhail Soto Zazueta

    (Universidad Autonoma de Sinaloa. Mexico)

Abstract

Objective: based upon a monetary conditions index, to evaluate the effectiveness of the exchange rate and the interest rate in determining the monetary stance in Mexico. Methodology: the relative effects of the interest rate, the real exchange rate, and inflation expectations are established using a vector autoregressive (VAR) model. Results: the results obtained show a 1:9.5 relationship between the exchange rate and the interest rate and their effect on inflation. Originality: the incorporation of inflation expectations in the determination of the weights allows us to capture the lasting impact of monetary adjustments on the real economy. Limitations: the definition of the monetary policy profile through the index is general and limited by economic shocks. It does not encompass all the dimensions of monetary policy and the interaction of other determining factors. Conclusions: the monetary conditions index reflects the profile of monetary policy and the preeminence of the interest rate in determining the monetary stance.

Suggested Citation

  • Giovani Hasael Chavez Pina & Irvin Mikhail Soto Zazueta, 2025. "Evaluation of the effectiveness of the interest rate and the exchange rate in defining monetary conditions in Mexico," EconoQuantum, Revista de Economia y Finanzas, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 22(2), pages 81-99, July-Dece.
    • Handle: RePEc:qua:journl:v:22:y:2025:i:2:p:81-99
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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