The Macroeconomic Impact of Fuel Price Controls and Excise Tax Subsidies in Mexico

Abstract

In 2022, the global economy faced an unprecedented energy-price shock, leading to a substantial surge in fuel prices. In this context, Mexico employed its excise tax framework to maintain local fuel prices below a reference price ceiling adjusted for inflation. This paper explores the evolution of this tax policy with a Dynamic Stochastic General Equilibrium (DSGE) model to assess its economic impact relative to alternative scenarios. The DSGE model integrates fuel usage in both household consumption and firms' production processes. Our analysis reveals that the price-smoothing mechanism effectively absorbs shocks and mitigates negative spillover effects on the broader economy, outperforming a government transfer program. However, prolonged and severe shocks impose considerable fiscal burdens, underscoring the necessity for alternative long-term strategies to decrease fuel dependency among households and firms.