Did the Bank of Mexico follow a systematic behaviour in its transition to an inflation targeting regime?

ISSN： 1466-4305

Source： Applied Financial Economics, Vol.23, Iss.14, 2013-07, pp. : 1205-1213

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Abstract

The main determinants of monetary policy in Mexico are analysed using conventional reaction functions to evaluate the gradual implementation of inflation targeting (IT) to achieve low and stable rates of inflation. In particular, we look at how the evolution of the inflation, growth and movements in exchange rates have conditioned the decisions of monetary policy taken by the central bank in Mexico for the period 1996 to 2010. Our results show in a systematic way that exchange-rate variations played a major role until 2000 (disinflation period) when IT was explicitly adopted and growth and inflation became the predominant variables with this new monetary regime. We conclude that IT in Mexico has effectively contributed to gain a nominal anchor for monetary policy.