The Effects of Annual Inflation Targets on the Conduct of Monetary Policy During the Disinflation Process in Mexico

39 Pages Posted: 7 Mar 2004

See all articles by Alfredo Cuevas

Alfredo Cuevas

International Monetary Fund (IMF)

Jesus Gonzalez-Garcia

International Monetary Fund (IMF)

Date Written: November 2003

Abstract

We study the effects of the inflation targets established for December of each year on the conduct of monetary policy. The hypothesis tested postulates that the annual inflation targets could have produced some seasonality in the operation of the overnight interbank funds market in which the government funding rate is determined. To test this hypothesis a series of Taylor rules are estimated using linear and nonlinear methods. The results show that the inflation targets established for the end of year have special importance in the determination of the interest rate during the middle months of each year, and in the last quarter the focus of attention shifts to the target corresponding to December of the next year. Also, the results suggest that during the disinflation period, the short term interest rate has shown less inertia and more intense reactions to inflationary pressures during the central months of each year.

Keywords: Inflation targets, Markov-switching models, Mexico, Monetary Policy, Regime Switching models

JEL Classification: E31, E52, E58

Suggested Citation

Cuevas, Alfredo and Gonzalez-Garcia, Jesus, The Effects of Annual Inflation Targets on the Conduct of Monetary Policy During the Disinflation Process in Mexico (November 2003). Available at SSRN: https://ssrn.com/abstract=514362 or http://dx.doi.org/10.2139/ssrn.514362

Alfredo Cuevas (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Jesus Gonzalez-Garcia

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Room: HQ2 10A-572
Washington, DC 20431
United States
(202) 6236310 (Phone)
(202) 6236159 (Fax)

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