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Global supply chain inflationary pressures and monetary policy in Mexico

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  • Hernández, Juan R.
  • Ventosa-Santaulària, Daniel
  • Valencia, J. Eduardo

Abstract

In this paper, we examine the impact of stress in the global supply chains on inflation and monetary policy in Mexico, a representative emerging market economy. Using non-linear local projections, we estimate the degree of monetary policy tightening required in a high-stress supply chain environment and compare it to that in a low-stress environment. We instrument the monetary policy shocks with shocks to the federal funds rate. Results suggest that in a high-stress regime, the effect of an increase in the monetary policy interest rate on inflation over a one-year period is reduced considerably. We argue that this reduction is due to the slow response of inflation expectations to a monetary policy tightening in a high-stress regime. Furthermore, raising the interest rate has an effect on producer price inflation, a channel that is absent in a low-stress regime. This finding highlights the role of monetary policy in stabilizing inflation when facing supply shocks that are not necessarily permanent.

Suggested Citation

  • Hernández, Juan R. & Ventosa-Santaulària, Daniel & Valencia, J. Eduardo, 2024. "Global supply chain inflationary pressures and monetary policy in Mexico," Emerging Markets Review, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:ememar:v:58:y:2024:i:c:s1566014123000948
    DOI: 10.1016/j.ememar.2023.101089
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    More about this item

    Keywords

    Inflation; Monetary policy; Emerging market economies; Mexico; Non-linear local projections;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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