IDEAS home Printed from https://ideas.repec.org/p/bdm/wpaper/2018-21.html
   My bibliography  Save this paper

Inflation Dynamics under Fiscal Deficit Regime Switching in Mexico

Author

Listed:
  • Ramos Francia Manuel
  • García-Verdú Santiago
  • Sánchez-Martínez Manuel

Abstract

We explore the dynamics of inflation, inflation expectations, and seigniorage-financed fiscal deficits in Mexico. To do so, we estimate the model in Sargent, Williams, and Zha (2009) using Mexican CPI inflation data. This model features dual expected inflation equilibriums and regime switching in the mean and variance of the fiscal deficit probability density function. We examine the dynamics of inflation and mean fiscal deficit regimes. In addition, we comment on the extent to which our results match to key economic events. Mexico has successfully stabilized inflation expectations for the past decades, an achievement for which fiscal policy has been fundamental. Nevertheless, this does not preclude the possibility of an increase in the expected price level or a switch to a regime in which inflation and its expectations become unstable.

Suggested Citation

  • Ramos Francia Manuel & García-Verdú Santiago & Sánchez-Martínez Manuel, 2018. "Inflation Dynamics under Fiscal Deficit Regime Switching in Mexico," Working Papers 2018-21, Banco de México.
  • Handle: RePEc:bdm:wpaper:2018-21
    as

    Download full text from publisher

    File URL: http://www.banxico.org.mx/publications-and-press/banco-de-mexico-working-papers/%7B76B320EC-AE79-2072-8CA6-6CAB169222BE%7D.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. López-Martín Bernabé & Ramírez de Aguilar Alberto & Sámano Daniel, 2018. "Fiscal Policy and Inflation: Understanding the Role of Expectations in Mexico," Working Papers 2018-18, Banco de México.
    2. Buiter, Willem H., 1987. "Borrowing to defend the exchange rate and the timing and magnitude of speculative attacks," Journal of International Economics, Elsevier, vol. 23(3-4), pages 221-239, November.
    3. Sims, Christopher A. & Waggoner, Daniel F. & Zha, Tao, 2008. "Methods for inference in large multiple-equation Markov-switching models," Journal of Econometrics, Elsevier, vol. 146(2), pages 255-274, October.
    4. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    5. Willem Buiter, 2000. "The Fallacy of the Fiscal Theory of the Price Level, Again," CESifo Working Paper Series 303, CESifo Group Munich.
    6. Sachs, J.D., 1989. "New Approaches To The Latin American Debt Crisis," Princeton Studies in International Economics 174, International Economics Section, Departement of Economics Princeton University,.
    7. Thomas Sargent & Noah Williams & Tao Zha, 2009. "The Conquest of South American Inflation," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 211-256, April.
    8. Daniel Chiquiar & Antonio Noriega & Manuel Ramos-Francia, 2010. "A time-series approach to test a change in inflation persistence: the Mexican experience," Applied Economics, Taylor & Francis Journals, vol. 42(24), pages 3067-3075.
    9. Manuel Ramos Francia & Alberto Torres García, 2005. "Reducing Inflation Through Inflation Targeting: The Mexican Experience," Working Papers 2005-01, Banco de México.
    10. Bruno, Michael, 1989. "Econometrics and the Design of Economic Reform," Econometrica, Econometric Society, vol. 57(2), pages 275-306, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Inflation; Inflation Expectations; Public Deficit; Fiscal Deficit; Regime-Switching; Monetary Policy; Fiscal Policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:bdm:wpaper:2018-21. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dirección de Sistemas). General contact details of provider: http://edirc.repec.org/data/bangvmx.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.