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Central Bank Policies in Mexico: Targets, Instruments, and Performance

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Abstract

The central argument of this paper is that in pursuing low inflation as its single and exclusive goal, and given some characteristics of the Mexican economy – a large degree of trade openness, a relatively high pass through of exchange rate movements into prices, and a low direct sensitivity of aggregate demand to interest rates – monetary policy has generated a recurrent tendency toward real exchange rate appreciation with very adverse effects on economic growth. The paper also examines central bank’s intervention in the foreign exchange market and the effectiveness of sterilized intervention in affecting the real exchange rate and potentially overcoming the tendency to real appreciation.

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Notes

  1. A symposium article presented at a Symposium on Latin American monetary policy.

  2. More precisely, the Foreign Exchange Commission comprises three members of the Ministry of Finance (Secretaría de Hacienda y Crédito Público (SHCP) – the Secretary and two Deputy Secretaries of the SHCP – and three members of the Banco de México – the Governor and two members of its Board of Governors. The Secretary of SHCP has the casting vote and operationally the central bank is responsible for implementing the interventions in the foreign exchange market.

  3. A list of past positions of governors and vice-governors, their academic background, and positions after leaving office is available upon demand from the author.

  4. Since 2000 the Central Bank publishes quarterly inflation reports to monitor the inflationary process, analyze inflation prospects, and discuss the conduct of monetary policy. More generally, the Banco de México has made great effort and progress in improving transparency and accountability. For example, since 2013 the minutes of the meetings of the Board of governors are made available to the public.

  5. Banco de México (2001) defines as follows the main features of this regime:(a) the recognition of price stability as the fundamental objective of monetary policy;(b) the establishment and announcement of inflation targets for the short and medium term;(c) the consolidation of an autonomous monetary authority;(d) the application of monetary policy in a transparent framework, based on a communication strategy with respect to the objectives, instruments, plans, and decisions of the monetary authority;(e) the permanent analysis of all the potential sources of inflationary pressures with the aim of evaluating the future path of inflation; and(f) the use of alternative measures of inflation, such as core inflation. This with the aim of identifying those phenomena which affect inflation transitorily as well as the medium term trend of price increases.

  6. This is the case of Martínez et al., 2001, Torres-García, 2002, Galindo and Guerrero, 2003, Ramos-Francia and Torres-García, 2005, Muñoz, 2005, Galindo and Catalán, 2009, Moura and de Carvalho, 2010, and OCDE, 2011.

  7. Muñoz (2005) uses similar specifications and finds similar results for a period that includes regimes different from inflation targeting (quarterly time series spanning the period 1982 Q1–2001Q4).

  8. Although the absence of the output gap from the Taylor rule does not imply that the output gap is absent from the loss function of the central bank, it suggests that the monetary authority gives relatively little weight to it (see Carlin and Soskice, 2006).

  9. It is worth noting that García-Iglesias et al. (2013) do not include the output gap among the explanatory variables but rather the deviation of the growth rate from its trend value.

  10. The reasons of the ‘fear to depreciate’ are similar to those of the ‘fear of floating’ (Calvo and Reinhart, 2002): the impact of depreciations on inflation and the increase in the real value of debts denominated in foreign currency that create financial difficulties for debtors and creditors.

  11. It is worth noting that this conclusion applies to the period 2002–2013, when the regime was in operation in all five countries of the IT group, but is sensitive to the particular period considered. Also, over this period, Mexico is in fact the only country in the group of inflation targeters that records a moderate real depreciation as a result of the shock of 2008–2009 (or, more precisely, Lehman’s collapse).

  12. For recent analyses of the determinants of productivity from a Young-Kaldor perspective in Mexico and Latin America, see, respectively, Ros, 2013 and 2014a, 2014b.

  13. Other factors contributing to the fall in the growth rate were a lower growth of the US economy and smaller net financial flows, while a higher real price for oil had a positive effect on growth.

  14. The creation of temporary US dollar facilities in 1995 to stabilize the foreign exchange market in the first months of 1995 and, for the same purpose, the swap line with the Federal Reserve and the flexible credit line with the IMF during the 2008–2009 crisis can also be included in this second modality.

  15. According to Siadoui (2005, p. 217): ‘In order to minimize the impact of the options scheme on the foreign exchange market, an opposite kind of intervention was designed to endow the process with some degree of symmetry. Thus, in February 1997 the Foreign Exchange Commission authorized Banco de México to undertake daily sales of up to US$0.2 billion to market participants through auctions. This mechanism was aimed at mitigating the volatility in the foreign exchange market by providing liquidity during days when uncertainty prevailed, thus discouraging some participants from engaging in speculative strategies …. it is important to underline that nearly 16% of the US$ acquired by Banco de México through the exercise of put options was recycled to the foreign exchange market via the auctioned sales’.

  16. For surveys see Sarno (2005) and Engel (2013).

  17. Although, strictly speaking, the Central Bank could adopt policies more favorable to growth without having to change the constitutional mandate, it seems improbable that it would attempt to do so.

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Acknowledgements

I am grateful to two anonymous referees, Nelson Barbosa, Santiago Capraro, Mario Damill, Roberto Frenkel, Guadalupe Mántey, Martín Rapetti, and participants at the Buenos Aires workshop for comments on a previous version of this paper. I am also grateful to Paul Wachtel for editorial revisions. Claudia Córdova and Luis Angel Monroy Gomez Franco provided excellent research assistance.

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  1. UNAM, Posgrado de Economía, Zona cultural, Ciudad Universitaria, Mexico City, Mexico

    Jaime Ros

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Ros, J. Central Bank Policies in Mexico: Targets, Instruments, and Performance. Comp Econ Stud 57, 483–510 (2015). https://doi.org/10.1057/ces.2015.6

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