The Effects of Annual Inflation Targets on the Conduct of Monetary Policy During the Disinflation Process in Mexico
39 Pages Posted: 7 Mar 2004
Date Written: November 2003
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: Suggested Citation