Structural Changes in the Transmission Mechanism of Monetary Policy in Mexico: A Non-Linear VAR Approach

Banco de Mexico Working Paper No. 2006-06

45 Pages Posted: 9 May 2006

See all articles by Jesus Gonzalez-Garcia

Jesus Gonzalez-Garcia

International Monetary Fund (IMF)

Alejandro Gaytan

Banco de Mexico, Macrofinancial Analysis Division

Date Written: April 2006

Abstract

In this paper we present a first approach to the study of the transformation in the transmission mechanism of monetary policy that has taken place in Mexico in recent years. For this purpose, we use a non-linear VAR model that allows for regime shifts. The comparison of the different regimes identified leads to the following main findings: a) there was a major structural change in the transmission mechanism around January 2001, date that coincides with the formal adoption of the inflation targeting framework; b) after this change, fluctuations in the real exchange rate have had smaller effects on the process of price formation, the formation of inflation expectations and the nominal interest rate; c) also, there have been stronger reactions of the nominal interest rate to increases in the output gap and the rate of inflation; and d) the movements of the nominal interest rate have a more effective influence on the real exchange rate and the rate of inflation.

Keywords: monetary policy, Mexico, monetary transmission mechanism, non-linear models

JEL Classification: E52, E58, F33

Suggested Citation

Gonzalez-Garcia, Jesus and Gaytan, Alejandro, Structural Changes in the Transmission Mechanism of Monetary Policy in Mexico: A Non-Linear VAR Approach (April 2006). Available at SSRN: https://ssrn.com/abstract=900255 or http://dx.doi.org/10.2139/ssrn.900255

Jesus Gonzalez-Garcia (Contact Author)

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)

Alejandro Gaytan

Banco de Mexico, Macrofinancial Analysis Division ( email )

5 de mayo 18, 5th floor,
Col. Centro
Mexico City, 06059 D.F. 06059
Mexico
(5255) 5237 2611 (Phone)
(5255) 5237 2687 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
153
rank
188,917
Abstract Views
857
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information