Alternatives to inflation targeting in Mexico
The paper addresses Mexico's experience with inflation targeting, which became operational in the aftermath of the 1994/95 tequila crisis. Using VAR econometrics over the post-1980 time series data, we find that monetary policy of the Banco de Mexico was asymmetric with respect to exchange rate movements - tightening when exchange rates depreciated, but not loosening when exchange rates appreciated. This lent a bias in favor of an over-valued exchange rate, leading to contractionary effects on output. We propose a more 'neutral' monetary policy so that the central bank of Mexico responds symmetrically to real exchange rate movements and thereby avoids the bias toward over-valuation. This policy may continue to be implemented within the boundaries of inflation targeting wherein the central bank would promote a 'stable and competitive' real exchange rate by establishing a sliding floor to the exchange rate in order to prevent excessive appreciation, but by allowing it to float freely otherwise.
Volume (Year): 22 (2008)
Issue (Month): 2 ()
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