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

See all articles by Felipe Meza

Felipe Meza

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Análisis e Investigación Económica

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

Meza, Felipe, Mexico from the 1960s to the 21st Century: From Fiscal Dominance to Debt Crisis to Low Inflation (March 1, 2018). Working Papers, Centro de Investigacion Economica, ITAM, 2018, Available at SSRN: https://ssrn.com/abstract=3182594 or http://dx.doi.org/10.2139/ssrn.3182594

Felipe Meza (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Análisis e Investigación Económica ( email )

Av. Camino a Santa Teresa #930
Col. Heroes de Padierna
Mexico City, D.F. 10700
Mexico

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