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The monetary transmission mechanism in Mexico

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  • Martina Copelman
  • Alejandro M. Werner

Abstract

An important question in macroeconomics has been how the transmission mechanism of monetary policy works. In particular, the question of whether there exists a credit channel for the transmission of monetary policy has been one of the central themes in the discussion of the effectiveness of monetary policy. If this channel exists, then shocks to credit markets, particularly to bank loans, can have real effects. This paper presents new evidence on the credit hypothesis for the case of Mexico after 1984. We present a simple variant of the open economy IS-LM model which includes a credit channel. The model has the following empirical implications which are absent from models which do not include a credit channel. We show that changes in the expectations of devaluation, the desired cash/deposit ratio, and measures of financial deregulation, will have real effects because they change the quantity of credit available in the economy. We explore these implications of the model through standard VAR techniques and find that the evidence strongly supports the credit view. We find that the impact on economic activity of credit and nominal depreciation rate shocks is very significant.

Suggested Citation

  • Martina Copelman & Alejandro M. Werner, 1995. "The monetary transmission mechanism in Mexico," International Finance Discussion Papers 521, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:521
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1995/521/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1995/521/ifdp521.pdf
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    References listed on IDEAS

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    1. Blinder, Alan S & Stiglitz, Joseph E, 1983. "Money, Credit Constraints, and Economic Activity," American Economic Review, American Economic Association, vol. 73(2), pages 297-302, May.
    2. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
    3. Guillermo A. Calvo & Manmohan S. Kumar, 1994. "Money Demand, Bank Credit, and Economic Performance in Former Socialist Economies," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 314-349, June.
    4. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-153, February.
    5. Rudiger Dornbusch & Alejandro Werner, 1994. "Mexico: Stabilization, Reform, and No Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 253-316.
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    Citations

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    Cited by:

    1. Marco Del Negro & Francesc Obiols-Homs, 2001. "Has monetary policy been so bad that it is better to get rid of it? The case of Mexico," Proceedings, Federal Reserve Bank of Cleveland, pages 404-439.
    2. Ahmed, Shaghil, 2003. "Sources of economic fluctuations in Latin America and implications for choice of exchange rate regimes," Journal of Development Economics, Elsevier, vol. 72(1), pages 181-202, October.
    3. Anubha Dhasmana, 2015. "Transmission of real exchange rate changes to the manufacturing sector: The role of financial access," International Economics, CEPII research center, issue 143, pages 48-69.
    4. Philippe Bacchetta & Fernando Ballabriga, 2000. "The impact of monetary policy and banks' balance sheets: some international evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 10(1), pages 15-26.

    More about this item

    Keywords

    Mexico ; Monetary policy;

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