Mexico from the 1960s to the 21st Century: From Fiscal Dominance to Debt Crisis to Low Inflation

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