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Monetary policy rules in a small open economy: An application to Mexico

  • Villagómez, F. Alejandro

    ()

    (Tecnológico de Monterrey, Campus Ciudad de México)

  • Orellana Polo, Javier

    (McKinsey)

We estimate a small-scale macro model for the Mexican economy under the New Keynesian (NK) framework and alternative interest rate rules for Mexico. With these results we evaluate the performance of the Bank of Mexico against a set of optimality principles derived in the NK literature. We show that the Bank of Mexico holds a preference for stabilizing not only inflation around target, but also acts to achieve an output gap close to zero. Furthermore, we show the central bank responds non-linearly to real exchange rate depreciations. We also show that, although the central bank has attempted to contain inflation, it has not conclusively satisfied the Taylor principle, so moderate inflation during the period may be partly a consequence of a favorable macroeconomic environment, rather than active policy.

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File URL: http://alejandria.ccm.itesm.mx/egap/documentos/EGAP-2009-01.pdf
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Paper provided by Tecnológico de Monterrey, Campus Ciudad de México in its series EGAP Working Papers with number 2009-01.

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Date of creation: Jan 2009
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Handle: RePEc:ega:docume:200901
Contact details of provider: Web page: http://www.ccm.itesm.mx/egap/
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