Mexico from the 1960s to the 21st Century: From Fiscal Dominance to Debt Crisis to Low Inflation
Working Papers, Centro de Investigacion Economica, ITAM, 2018
68 Pages Posted: 1 Jun 2018
Date Written: March 1, 2018
Abstract
The objective of this paper is to analyze the monetary and fiscal history of Mexico using as framework the model of Sargent and Wallace (1981). I study the period 1960-2016. I evaluate the ability of the model to explain the crises of 1982 and 1994. The model can explain the 1982 Debt Crisis, but cannot explain the 1994 Crisis. A constitutional change in the relation between the Federal Government and Banco de México, and policy choices made in the aftermath of the 1994 Crisis, are consistent with a transition from fiscal dominance to an independent central bank. Inflation fell persistently after 1995, reaching values of 3 percent per year in mid-2016. That number is the target of the central bank. After a long transition after the 1982 Crisis Mexico succeeded controlling inflation. I discuss the forces that reduced inflation over time: A long sequence of primary surpluses, negotiations between the government, workers and businessmen, the constitutional change that gave independence and a goal to the central bank, and the current inflation targeting regime. On the fiscal side I observe a change in the downward trend of the total debt to GDP ratio, as it fell from the 1980s to 2009, year in which it started growing persistently.
Keywords: Mexico, Economic History, Fiscal Policy, Monetary Policy
JEL Classification: E58, E63, N16
Suggested Citation: Suggested Citation