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Reducing Inflation Through Inflation Targeting: The Mexican Experience

  • Manuel Ramos Francia
  • Alberto Torres García
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    This paper reviews the role of monetary policy in the disinflation process that has taken place in the Mexican economy in recent years. The purpose is to show that, once an economy establishes a sustainable fiscal position, an inflation targeting framework can be seen as an efficient mechanism to impose discipline on monetary policy and, thus, to reduce inflation. This paper describes the measures that were taken after the 1995 crisis to stabilize the economy and that prevented the possibility of a fiscal dominance situation from arising. Consequently, the role of monetary policy in reducing inflation is analyzed, in particular its response to different inflationary shocks. Results show that in conducting the successful disinflationary process, Banco de México's responses to inflationary shocks have been consistent with inflation targeting principles.

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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B8D174272-9EB2-18C4-53DE-13865BF1982D%7D.pdf
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    Paper provided by Banco de México in its series Working Papers with number 2005-01.

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    Date of creation: Jul 2005
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    Handle: RePEc:bdm:wpaper:2005-01
    Contact details of provider: Web page: http://www.banxico.org.mx

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    1. 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.).
    2. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
    3. Svensson, L-E-O, 1996. "Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets," Papers 615, Stockholm - International Economic Studies.
    4. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
    5. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
    6. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    7. Richard Clarida & Jordi Gali, 1994. "Sources of real exchange rate fluctuations: how important are nominal shocks?," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
    8. Kenneth N. Kuttner & Adam S. Posen, 1999. "Does Talk Matter After All? Inflation Targeting and Central Bank Behavior," Working Paper Series WP99-10, Peterson Institute for International Economics.
    9. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
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