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Monetary Policy Rules in a Small Open Economy: An Application to Mexico

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  • Rodolfo Cermeño
  • F. Alejandro Villagómez
  • Javier Orellana Polo

Abstract

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. Our system estimation results 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 find that the central bank responds non-linearly to real exchange rate depreciations. We also find that the central bank has actively attempted to neutralize demand and supply shocks through monetary policy that is consistent with the Taylor principle.

Suggested Citation

  • Rodolfo Cermeño & F. Alejandro Villagómez & Javier Orellana Polo, 2012. "Monetary Policy Rules in a Small Open Economy: An Application to Mexico," Journal of Applied Economics, Taylor & Francis Journals, vol. 15(2), pages 259-286, November.
    • Handle: RePEc:taf:recsxx:v:15:y:2012:i:2:p:259-286
    DOI: 10.1016/S1514-0326(12)60012-9
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Política Monetaria en México y Reglas de Taylor
      by Alejandro Villagomez in Tintero Económico Diario on 2012-11-22 06:07:00
    2. Banxico y la Posible Reducción en su Tasa de Referencia
      by Alejandro Villagomez in Tintero Económico Diario on 2013-03-08 08:40:00
    3. Entendiendo la Decisión de Banxico
      by Alejandro Villagomez in Tintero Económico Diario on 2014-02-01 06:39:00
    4. Banxico reduce su Tasa a 3%: ¿Medida Correcta, Oportuna y Efectiva?
      by Alejandro Villagomez in Tintero Económico Diario on 2014-06-07 19:27:00
    5. Banxico y sus Intervenciones en el Mercado Cambiario
      by Alejandro Villagomez in Tintero Económico Diario on 2014-12-09 07:13:00
    6. ¿Cómo Entender las Acciones Monetarias y Fiscales de Hoy?
      by Alejandro Villagomez in Tintero Económico Diario on 2016-02-18 00:24:00
    7. ¿Subirá Banxico su tasa de referencia en su próxima reunión?
      by Alejandro Villagomez in Tintero Económico Diario on 2016-09-25 06:56:00
    8. ¿Aumentará su Tasa de Referencia Banxico la Próxima Semana?
      by Alejandro Villagomez in Tintero Económico Diario on 2017-02-04 08:10:00
    9. Banxico aumentó su tasa de referencia ¿Está pecando de "halcón"? o hay algo más...
      by Alejandro Villagomez in Tintero Económico Diario on 2017-02-10 23:40:00
    10. Banxico mantiene su posición de "halcón" (con un disidente)
      by Alejandro Villagomez in Tintero Económico Diario on 2017-06-23 22:11:00

    Citations

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    Cited by:

    1. Alicia Garcia-Herrero & Eric Girardin & Arnoldo Lopez-Marmolejo, 2019. "Mexico¡¯s Monetary Policy Communication and Money Markets," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(2), pages 81-97, February.
    2. Hummaira Jabeen, 2022. "Monetary Policy Shock Transmission in Emerging Markets," Journal of Policy Research (JPR), Research Foundation for Humanity (RFH), vol. 8(4), pages 379-390, December.
    3. Alicia Garcia-Herrero & Eric Girardin & Arnoldo Lopez Marmolejo, 2015. "Mexico’s monetary policy communication and money markets," Working Papers 1515, BBVA Bank, Economic Research Department.
    4. Ruch,Franz Ulrich, 2021. "Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies," Policy Research Working Paper Series 9711, The World Bank.
    5. Alicia Garcia-Herrero & Eric Girardin & Enestor Dos Santos, 2015. "Follow what I do and also what I say: monetary policy impact on Brazil’s financial markets," Working Papers 1512, BBVA Bank, Economic Research Department.
    6. Luis Fernando Colunga Ramos, 2024. "The Loan Puzzle in Mexico," Working Papers 2024-15, Banco de México.
    7. Rodolfo Cermeño & Julio Mamani-Palacios, 2013. "Regímenes Monetarios y Volatilidad del Tipo de Cambio Real: El Caso Peruano, 1995-2012," Working Papers DTE 565, CIDE, División de Economía.
    8. Villarreal, Francisco G., 2014. "Monetary Policy and Inequality in Mexico," MPRA Paper 57074, University Library of Munich, Germany.
    9. Bui Thanh Trung, 2022. "Measuring Monetary Policy in Emerging Economy: The Role of Monetary Condition Index," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 70(6), pages 499-522, June.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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