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). Banco de Mexico Working Paper No. 2006-06, 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)

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