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
Date Written: April 2006
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: Suggested Citation