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Summary: This paper applies a novel approach to study the impact of different shocks on the price level. It uses a classical dichotomy model with monetary policy regime shifts at known dates. First, there was a regime dominated by money, afterwards a regime driven by the exchange rate and a third one with inflation targeting. The result is a CVAR with constant long-run parameters but regime-dependent adjustment coefficients. This overcomes the challenge of explaining, within a single theoretical framework, inflation dynamics in Mexico since the country abandoned the gold standard. The model encompasses known results, offers new insights and clarifies decades-old debates on key aspects of the inflationary process such as inertia, the role of money, the exchange rate pass-through and the impact profile of other variables. The model proposed here is very parsimonious, it does not require inflation lags nor dummy variables. It also displays a very good pseudo out-of-sample forecasting performance.
Author(s): Garcés Díaz Daniel     


Summary: This paper investigates the performance of early warning systems in real-time, using forecasts of indicators that were available at the moment predictions are to be made. The study analyzes currency crises in eight Latin American and Central and Eastern European countries, distinguishing an estimation period 1990-2009 and a prediction period 2010-2014. We apply two varieties of early warning systems: the signal approach and the logit models. For both methods we find that using forecasts of the indicators worsens the predictive ability of early warning systems compared to using the most recently available information (ex post).
Author(s): Boonman Tjeerd; Jan P.A.M. Jacobs; Kuper Gerard H.; Romero Alberto     


Summary: We identify the international credit channel of monetary policy by analyzing the universe of corporate loans in Mexico matched with firm and bank data, and by exploiting foreign monetary policy shocks in a country with a large presence of European and U.S. banks. The robust results show that a softening of foreign monetary policy increases the supply of credit of foreign banks to Mexican firms. Each regional policy shock mainly affects supply via their respective banks, in turn implying strong real effects, with lower elasticities from QE. The impact of low foreign monetary policy rates and expansive QE is stronger on local borrowers with higher ex-ante loan rates -reach-for-yield- and with higher ex-post loan defaults, thus suggesting an international risk-taking channel of monetary policy. All in all, the results suggest spillovers of core-countries´ monetary policies on emerging markets, both in the foreign monetary softening and tightening part.
Author(s): Morais Bernardo; Peydró José-Luis; Roldán-Peña Jessica; Ruiz Claudia     


Summary: In this paper we use data from Mexico to identify Dornbusch's (1976) exchange rate overshooting hypothesis. We specify and estimate a structural cointegrated VAR that considers explicitly the presence of a set of long-run theoretical relations on macroeconomic variables (a purchasing power parity, an uncovered interest parity, a money demand, and a relation between domestic and U.S. output levels). We then impose a recursiveness assumption to identify the response of domestic variables to a monetary policy shock. The long-run restrictions embedded in the model are themselves identified, estimated, and tested using an ARDL methodology that is robust to the degree of persistence of the time series and, in particular, to whether they are trend- or first-difference stationary. With this approach, we are able to find that the response of the exchange rate to monetary policy shocks is consistent with Dornbusch's model.
Author(s): Capistrán Carlos; Chiquiar Daniel; Hernández Juan R.     


Summary: In a New Keynesian model with the BGG accelerator and risk shocks, we show that violations of Tinbergen's Rule and strategic interaction between economic authorities undermine the effectiveness of monetary and financial policies. Separate monetary and financial policy rules produce higher welfare than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to credit. Reaction curves for the policy-rule elasticities are nonlinear, which reflects shifts in these elasticities from strategic substitutes to complements. The Nash equilibrium is inferior to the Cooperative equilibrium, both are inferior to a first-best outcome, and both might produce tight money-tight credit regimes.
Author(s): Carrillo Julio A.; Mendoza Enrique G.; Nuguer Victoria; Roldán-Peña Jessica     


Summary: This paper models the housing sector, mortgages and endogenous default in a DSGE setting with nominal and real rigidities. We use data for the period 1981-2006 to estimate our model using Bayesian techniques. We analyze how an increase in risk in the mortgage market raises the default rate and spreads to the rest of the economy, creating a recession. In our model two shocks are well suited to replicate the subprime crisis and the Great Recession: the mortgage risk shock and the housing demand shock. Next we use our estimated model to evaluate a policy that reduces the principal of underwater mortgages. This policy is successful in stabilizing the mortgage market and makes all agents better off.
Author(s): Lambertini Luisa; Nuguer Victoria; Uysal Pinar     


Summary: Existing literature uses data based on the residence principle to proxy for currency mismatch. This paper collects data on assets and liabilities broken by currency of denomination in the banking sector in Latin America and the Caribbean. I show that the information used in the literature cannot substitute for data broken down by currency and present new facts. I observe a reduction in long foreign currency positions, with several banking sectors taking short positions after 2006. Employing a methodology that accounts for time-varying unobservable characteristics, this reduction is shown to be partially explained by the implementation of prudential policies.
Author(s): Tobal Martín     
External publications: Forthcoming in International Journal of Central Banking


Summary: We study how unconventional monetary policy announcements affect the entry of foreign investment in debt and equity in Mexico, placing special focus on announcements related to the third QE program and the taper tantrum episode. A novel dataset on daily debt and equity flows, that maps Balance of Payments data quite well, allows this paper to provide a better insight into movements of capital. The results suggest that both equity and debt flows appear to react immediately to unexpected U.S. monetary policy announcements, in particular if these are considered as bad news by investors. In turn, results using weekly data support the idea that investors interested in fixed income instruments move more prudently than those interested in equity who react quickly.
Author(s): Hernández Vega Marco A.     


Summary: This document studies the recent evolution of the break-even-inflation implicit in the yields of long-term financial instruments in Mexico. In particular, it analyzes the dynamics of its main components: the long-run inflation expectation and the inflationary risk premium, which are estimated by means of an affine term structure model of interest rates. The results show that the gradual reduction registered in such compensation in the last years is the result of the decrease showed by both components. This reflects, on the one hand, the progressive convergence of the estimated inflation expectation to Banco de México's inflation target as well as its anchoring and, on the other hand, that nominal-bond holders have required a lower hedging against future inflation, possibly, as a reflection of a lower risk perception associated to it.
Author(s): Aguilar-Argaez Ana María; Elizondo Rocío; Roldán-Peña Jessica     


Summary: Forecasts of inflation in the United States since the mid eighties have had smaller errors than in the past, but those conditional on commonly used variables cannot consistently beat the ones from univariate models. This paper shows through simple modifications to the classical monetary model that something similar occurred in those major Latin American economies that achieved their own "Great Moderation." For those countries that did not attain macroeconomic stability, inflation forecasting conditional on some variables has not changed. Allowing the parameters that determine Granger causality to change when the monetary regime does, makes possible the estimation of parsimonious inflation models for all available data (eight decades for one country and five for the others). The models so obtained ouperform others in pseudo out-of-sample forecasts for most of the period under study, except in the cases when an inflation targeting policy was successfully implemented.
Author(s): Garcés Díaz Daniel     


Summary: This paper empirically compares the implications of two distinct models of FX intervention, within the context of Inflation Targeting Regimes. For this purpose, it applies the VAR methodology developed by Kim (2003) to the cases of Mexico and Brazil. Our results can be summarized in three points. First, FX interventions have had a short-lived effect on the exchange rate in both economies. Second, the Brazilian model of FX intervention entails higher inflationary costs and this result cannot be entirely explained by differences in the level of pass-through. Third, each model is associated with a different interaction between exchange rate and interest rate setting (conventional monetary policies).
Author(s): Tobal Martín; Yslas Renato     
External publications: Joint Research Network of Central Banks of the Americas, forthcoming


Summary: We study the ability of exclusion and sign restrictions to measure monetary policy shocks in small open economies. Our Monte Carlo experiments show that sign restrictions systematically overshoot inflation responses to the said shock, so we propose to add prior information to limit the number of economically implausible responses. This modified procedure robustly recovers the transmission of the shock, whereas exclusion restrictions show large sensitivity to the assumed monetary transmission mechanism of the model and the set of foreign variables included in the VAR. An application with Mexican data supports our findings.
Author(s): Carrillo Julio A.; Elizondo Rocío     


Summary: We construct inflation pressure indicators based on the long-run relationship that exists between monetary aggregates and prices, once it is adequately adjusted to account for the scale of transactions, as well as the opportunity cost of holding money. To that end, an extensive long-run econometric analysis of money demand is carried out for Mexico using the monetary aggregate M1. Based on it, two indicators are calculated, the money gap and the m* indicator. Such gap measures deviations of real M1 from its relationship with its long-run determinants. The m* indicator is based on the estimation of the price index which is congruent with the quantity of M1 in the economy once it is adjusted for the long-run tendency of its determinants considering its long-run coefficients. Our results indicate that monetary policy has been congruent with the inflation target of Banco de México.
Author(s): Ramos Francia Manuel; Noriega Antonio E.; Rodríguez-Pérez Cid Alonso     


Summary: This paper presents an econometric analysis of the demand for the monetary aggregate M1 in Mexico. Using cointegration techniques, we identify both a stable long-run relationship between M1 and its determinants, and a statistically sound single-equation error-correction model. Results are used to carry out the following simple applications: (1) empirical determination of the value and stability of dual inflationary equilibria, given the observed seigniorage levels; (2) calculation of the seigniorage maximizing inflation rate, and (3) analysis of the potential relationship between a measure of excess money and inflation. Results indicate that the low inflation equilibrium is stable, and that the excess money indicator shows, in retrospective, some capacity in predicting inflationary pressures.
Author(s): Noriega Antonio E.; Ramos Francia Manuel; Rodríguez-Pérez Cid Alonso     


Summary: Financial stability discussions have mainly revolved around the degree of leverage in financial institutions. Yet, some authors have argued that there might be mechanisms associated with unleveraged institutions that could entail financial instability. We aim to shed light on the possible presence of run-like dynamics in the bond fund flows to and from a group of Emerging Market Economies (EMEs). We examine some of the US monetary policy's implications on these dynamics. As argued, e.g., in Feroli et al. (2014), given the type of incentives many funds face, run-like dynamics might take place, although such funds are mostly unleveraged. We find evidence of the presence of run-like dynamics in the bond flows in several EMEs. We also find evidence that changes in US monetary policy affect such dynamics.
Author(s): Ramos Francia Manuel; García-Verdú Santiago     


Summary: We compare the experience of Latin American external debt crises, in particular the one in the 80s, with the current European one. We do so with the aim of shedding some light on the needed adjustment mechanisms. We argue for the need of much larger debt relief in Europe. To address the moral hazard problems that would arise, we propose providing such relief conditional on the reduction of both the fiscal and the current account deficits to zero as a commitment signal.
Author(s): Ramos Francia Manuel; Aguilar-Argaez Ana María; García-Verdú Santiago; Cuadra Gabriel     


Summary: We study variations in the risk-neutral distributions of the exchange rates in Brazil, Chile, Colombia, Mexico, and Peru due to interventions implemented by these countries. For this purpose, we first estimate the risk-neutral densities of the exchange rates based on derivatives market data, for one-day and one-week horizons. Second, using a linear regression model, we assess possible effects on the distributions of the expected exchange rates due to these interventions. We find little evidence of an effect on the expected exchange rates' means, volatilities, skewness, kurtoses, risk premia, and tails' parameters. In the few cases for which we do find some statistical evidence of an effect, it tends to be short-lived or not economically significant. On the other hand, we find evidence that interventions which objective is to restore and/or assure the proper functioning of exchange rate markets have a higher probability of success. This probability increases as the amount of resources to intervene at the disposal of the central bank increases. Needless to say, there are limits to the methodology we use.
Author(s): García-Verdú Santiago; Ramos Francia Manuel     


Summary: Using a vector error correction model I test whether shocks in the funding liquidity conditions in the U.S. and Europe separately explain deviations from the covered interest parity (CIP) between the U.S. Dollar and the Mexican Peso. I find that: (1) Apparent deviations from the CIP seem to be persistent, unless a closer measure to the true costs of funding for the agents is considered. (2) A stable long-run equilibrium relation emerges when I include the effects of funding liquidity shocks stemming from the U.S. and Europe. (3) The exchange rate forward premium adjusts towards a long-run equilibrium relation given by the CIP. (4) Surprisingly, the yield on 1-month Mexican CETEs has its own stochastic trend despite the strong relation between the U.S. and Mexico's economies. (5) Analysis confirms that both future and spot exchange rates are affected by shocks stemming from the U.S. Treasury Bills, the funding liquidity in the U.S. and Europe, and the Mexican CETEs.
Author(s): Hernández Juan R.     


Summary: This paper studies the effects of three financial shocks in the economy: a net-worth shock, an uncertainty or risk shock, and a credit-spread shock. We argue that only the latter can push the nominal interest rate against its zero lower bound. Further, a recessionary shock to the net worth or the credit spread generates a positive response for loans, which is counter-intuitive during an economic downturn. Finally, we find that there is an optimal commitment period for the central bank to keep the nominal interest rate equal to zero (forward guidance) after a financial turmoil. Beyond that optimal period, the volatility of inflation and output rise quick and sharply. Thus, an excessive forward guidance policy may destabilize the economy.
Author(s): Carrillo Julio A.; Poilly Céline     


Summary: Wage indexation practices have changed. Evidence on the U.S. for instance suggests that wages were heavily indexed to past inflation during the Great Inflation but not during the Great Moderation. However, most DSGE models assume fixed indexation parameters in wage setting, which might not be structural in the sense of Lucas (1976). This paper presents a New-Keynesian model in which workers, by maximizing their welfare, set their wage indexation rule in response to aggregate shocks and monetary policy. We find that workers index their wages to past inflation when technology and permanent inflation-target shocks drive output fluctuations; when aggregate demand shocks do, workers index to trend-inflation. In addition, workers' choices do not coincide with the social planner's choice, which may explain the observed changes in wage indexation in the post-WWII U.S. data.
Author(s): Carrillo Julio A.; Peersman Gert; Wauters Joris     


Summary: I study the diffusion process of permanent disinflationary shocks in the Mexican economy using disaggregated price data for 283 goods across 46 cities in the period 1995-2012. I first show that the distribution of shocks shows considerable heterogeneity, with more than 80% of all cases having experienced a break. I then show that both the likelihood and timing are spatially correlated across cities, and find a positive and concave relationship between CPI weights and the likelihood and timing of a break. These findings suggest that the process of structural change follows a diffusion process across the spatial and goods dimensions.
Author(s): Vaughan Daniel     


Summary: This paper estimates the magnitude of the exchange rate pass-through to consumer prices in Mexico. Moreover, it analyzes if the pass-through dynamics have changed in recent years. In particular, it uses a methodology that generates results consistent with the hierarchy implicit in the CPI. The results suggest that the exchange rate pass-through to the general price level is low and not statistically significant. However, the pass-through is positive and significant for goods prices. Furthermore, the exchange rate pass-through declined over the 2000's and the depreciation observed in 2011 did not change this trajectory.
Author(s): Cortés Espada Josué Fernando     


Summary: This paper introduces an indicator of consumers' inflation expectations based on data from the National Consumer Confidence Survey of Mexico (ENCO, in Spanish), and tests its predictive power over CPI inflation and other measures of inflation that correspond to smaller baskets of consumer goods, for periods that range from 1 to 12 months. Our findings show that between January 2003 and September 2010, the predictive capability of the indicator over the different measures of inflation used was weak. Due to a modification in the survey questionnaire in October 2010, as of that date we observe a significant change in the responses and, thus, in the behavior of the indicator of consumers' inflation expectations. For this reason, from October 2010 on the main use of this indicator is to be a reference of consumers' confidence in price stability.
Author(s): Murillo Garza José Antonio; Sánchez-Romeu Paula     


Summary: This paper applies a stochastic frontier approach to analyze the evolution of technical efficiency in manufacturing as a source of regional growth, taking as a unit of analysis the Mexican states in the period 1988-2008. The main findings of our analysis are threefold. First, technical efficiency was increasing over the analyzed period and acted as a mechanism to reduce the labor productivity gap across states. Second, Mexican regions can increase manufacturing production about one third, on average, using the same amount of inputs which implies ample potential for regional growth. Third, there exists a considerable difference in the level of technological development, measured in terms of structural efficiency, of the north and the central regions with respect to the south that partially explains the labor productivity gap among regions.
Author(s): Chávez Juan Carlos; Fonseca Felipe J.     
External publications: forthcoming in Regional and Sectoral Economic Studies.


Summary: In this paper we analyze the synchronization between the business cycles of US and Mexican regions. Regional economic activity in Mexico is measured using regional coincident indexes recently developed at Banco de México, while US aggregate economic activity is measured with the national coincident index of the Federal Reserve Bank of Philadelphia. The framework for the empirical analysis is the structural linear times series model. We find a regional pattern in the covariance between cyclical disturbances in the US and in the Mexican regions: it is higher in the Northern than in the Central and Southern regions of the country. We also find that the elasticity of Mexican regional economic activity with respect to the US's aggregate economic activity exhibits a similar pattern. Moreover, while the variance of the business cycles in the Northern, North-Central, and Central regions is mostly associated with shocks to the US economy, in the Southern region it is mostly related to specific shocks to the Mexican economy.
Author(s): Delajara Marcelo     


Summary: This paper, first, reviews briefly the literature on the term structure of interest rates, citing some of the most important studies done on the topic for the Mexican case in the last years. In addition, the development of the government debt market is described. Second, evidence against the expectation hypothesis is shown and the deviations of the term structure from this hypothesis are examined. Third, it is documented that much of the variability of the term structure is due to changes in its level. Fourth, some of the statistics of the term structure are associated with macroeconomic variables, specifically the short-term rate and the output gap as measured with the IGAE index. Regarding this last point, evidence is found that changes in the term structure of interest rates' slope are associated with the monetary policy stand along the business cycle. The nominal interest rates used in the analysis go from July 2002 to June 2011.
Author(s): García-Verdú Santiago     
External publications: La Deuda Pública en México, Special Issue of the Gaceta de Economía, ITAM, pp. 351-3.


Summary: The global financial crisis of late 2008 could not have provided more convincing evidence that price stability is not a sufficient condition for financial stability. In order to attain both, central banks must develop macroprudential instruments in order to prevent the occurrence of systemic risk episodes. For this reason testing the effectiveness of different macroprudential tools and their interaction with monetary policy is crucial. In this paper we explore whether two policy instruments, namely, a capital adequacy ratio rule in combination with a Taylor rule may provide a better macroeconomic outcome than a Taylor rule alone. We conduct our analysis by appending a macroeconometric financial block to an otherwise standard semistructural small open economy neokeynesian model for policy analysis estimated for the Mexican economy. Our results show that with the inclusion of the second instrument, the central bank may obtain substantial gains. Specifically, the central authority can isolate financial shocks and dampen their effects over macroeconomic variables.
Author(s): Sámano Daniel     


Summary: We examine two approaches characterized by different tail features to extract market expectations on the Mexican peso-US dollar exchange rate. Expectations are gauged by risk-neutral densities. The methods used to estimate these densities are the Volatility Function Technique (VFT) and the Generalized Extreme Value (GEV) approach. We compare these methods in the context of monetary policy announcements in Mexico and the US. Once the surprise component of the announcements is considered, our results indicate that, although both VFT and GEV suggest similar dynamics at the center of the distribution, these two methods show significantly different patterns in the tails. Our empirical evidence shows that the GEV model captures better the extreme values.
Author(s): Abarca Gustavo; Rangel José Gonzalo; Benavides Guillermo     
External publications: Journal of Derivatives, Vol. 19, No. 4, pp. 70-90.


Summary: This paper extends recent research on the behaviour of the t-statistic in a long-horizon regression (LHR). We assume that the explanatory and dependent variables are generated according to the following models: a linear trend stationary process, a broken trend stationary process, a unit root process, and a process with a double unit root. We show that, both asymptotically and in finite samples, the presence of spurious LHR depends on the assumed model for the variables. We propose an asymptotically correct inferential procedure for testing the null hypothesis of no relationship in a LHR, which works whether the variables have a long-run relationship or not. Our theoretical results are applied to an international data set on money and output in order to test for long-run monetary neutrality. Under our new approach and using bootstrap methods, we find that neutrality holds for all countries.
Author(s): Noriega Antonio E.; Ventosa-Santaulària Daniel     


Summary: We consider combinations of subjective survey forecasts and model-based forecasts from linear and non-linear univariate specifications as well as multivariate factora-augmented models. Empirical results suggest that a simple equal-weighted average of survey forecasts outperform the best model-based forecasts for a majority of macroeconomic variables and forecast horizons. Additional improvements can in some cases be gained by using a simple equal-weighted average of survey and model-based forecasts. We also provide an analysis of the importance of model instability for explaining gains from forecast combination. Analytical and simulation results uncover break scenarios where forecast combinations outperform the best individual forecasting model.
Author(s): Aiolfi Marco; Capistrán Carlos; Timmermann Allan     
External publications: Forthcoming in Oxford Handbook of Economic Forecasting, M. P. Clements and D. F. Hendry (eds.), Oxford University Press.


Summary: To advance our understanding of the mechanisms through which monetary policy affect the economy, in this note we analyze the volatilities of the Mexican short-term interest rate and of the peso-Dollar exchange rate under two monetary policy instruments: a non-borrowed reserves requirement target (the "Corto") and an interest rate target. Using tests for multiple structural changes, we document that both volatilities decreased around the time Banco de México started the transition from the former to the latter. With respect to the volatility transmission from interest rates to exchange rates and vice versa, we find, using a bivariate GARCH model and causality-in-variance tests, bi-causality during the period of the Corto, but no causal relation after the transition started.
Author(s): Benavides Guillermo; Capistrán Carlos     
External publications: Monetaria, Vol. XXXII, No. 3, pp. 391-412.


Summary: There are a significant number of papers that show that the slope of the yield curve has a certain ability to forecast real economic activity and inflation. However, in emerging economies this source of information has not been thoroughly used; Mexico is not an exception. The economic stability achieved in this country in recent years has allowed the government to issue, since 2001,long-term bonds. With more stable economic cycles, the information included in the long part of the yield curve could be a useful tool to estimate future economic activity. This document analyses the predictive power of the spread. Moreover, the spread is divided into two main components to analyse the origin of its predictive power. Next, the power of the spread to forecast economic cycles is tested. Last, out-of-sample tests of the spread are carried out. The findings show that the yield curve provides significant information about future economic activity.
Author(s): Reyna Cerecero Mario; Salazar Cavazos Diana; Salgado Banda Héctor     
External publications: Monetaria, Vol. XXXII, No. 3, pp. 297-357.


Summary: This paper provides a description of some of the empirical regularities for the Mexican business cycle. The purpose is to have a benchmark for assessing dynamic stochastic general equilibrium models for the Mexican case. We follow the Kydland and Prescott methodology to describe the cyclical properties of the Mexican business cycle. We describe the volatility of several macroeconomic variables as well as their correlation with GDP. We use two filters to remove trends from the data: Hodrick-Prescott filter and Baxter-King filter. The idea is to check the robustness of the results. Qualitatively the findings are similar across both filtering methods. In order to analyze changes in the properties of the Mexican business cycle, the whole period of analysis is divided into two sub-periods, 1980-1995 and 1996-2006. The first sub-period is marked by high economic instability and the second and most recent sub-period is marked by a significant decrease in the volatility of all variables.
Author(s): Cuadra Gabriel     


Summary: This document analyzes inflation, exchange rate, interest rate, and GDP growth forecasts from the monthly Survey of Specialists in Economics from the Private Sector, maintained by Banco de México. The study concentrates on the mean across forecasters for the period from January 1995 to April 2008. The study evaluates the efficiency in the use of information and the relative performance using as benchmarks forecasts from time series models and from other macroeconomic variables. Inflation, interest rate, and GDP expectations seem to incorporate information in a relatively efficient manner. These forecasts appear to be better, in mean squared error terms, than the benchmark forecasts, except for the case of one-year-ahead inflation. In addition, exchange rate forecasts do not seem to optimally incorporate available information and do not seem to improve upon forecasts obtained from a random walk model.
Author(s): Capistrán Carlos; López Moctezuma Gabriel     
External publications: El Trimestre Económico, Vol. LXXVII (2), No. 306, pp. 275-312.


Summary: This paper investigates how different macroeconomic shocks affect the term-structure of interest rates in Mexico. In particular, we develop a model that combines a no-arbitrage specification of the term structure with a macroeconomic model of a small open economy. We find that shocks that are perceived to have a persistent effect on inflation affect the level of the yield curve. The effect on medium and long-term yields results from the increase in expected future short rates and in risk premia. With respect to demand shocks, our results show that a positive shock leads to an upward flattening shift in the yield curve. The flattening of the curve is explained by both the monetary policy response and the time-varying term premia.
Author(s): Cortés Espada Josué Fernando; Ramos Francia Manuel     


Summary: We analyze the issue of the impact of multiple breaks on monetary neutrality results, using a long annual international data set. We empirically verify whether neutrality propositions remain addressable (and if so, whether they hold or not), when unit root tests are carried out allowing for multiple structural breaks in the long-run trend function of the variables. It is found that conclusions on neutrality are sensitive to the number and location of breaks. In order to interpret the evidence for structural breaks, we introduce a notion of deterministic monetary neutrality, which naturally arises in the absence of permanent stochastic shocks to the variables.
Author(s): Noriega Antonio E.; Soria Luis M.; Velázquez Ramón     
External publications: Economic Modelling, Vol. 25, Issue 6, pp. 1261-1275.


Summary: In this paper we examine the effect of having an inflation targeting framework on the dispersion of inflation forecasts from professional forecasters. We use a panel data set of 26 countries -including 14 inflation targeters- with monthly information from the last 16 years. We find that the dispersion of long-run inflation expectations is lower in targeting regimes after controlling for country-specific effects, time-specific effects, initial dispersion, the level and the variance of inflation, disinflation periods, and global inflation. When we differentiate between developed and developing countries, we find different dynamics for each group. In particular, the mentioned effect of inflation targeting seems to be present only on the developing countries.
Author(s): Capistrán Carlos; Ramos Francia Manuel     
External publications: Journal of Money, Credit and Banking, Vol. 42, No. 1, pp, 114-134


Summary: Autonomy is not a new issue in the history of Banco de México. This paper presents how the concept of central bank autonomy has evolved through three main stages. In the first stage, known as statutory autonomy (1925-1938), autonomy was formalized through rules which established ceilings to the growth of key operative variables. The next stage, known as charismatic autonomy (1955-1970), relied on the defense by important political figures on the central bank´s role. Sound public finances were a significant aid in this stage. The end of sound public finances signaled the termination of the central bank´s charismatic autonomy. The last stage, known as institutional autonomy (1994 to date), is certainly more robust. Apart from having contributed to preserve sound public finances, the central bank´s institutional autonomy is based on a constitutional mandate that determines the central bank´s functions, a self-governing directive body, and administrative and budget independence.
Author(s): Turrent y Díaz Eduardo     


Summary: In this paper we formalize the uncertainty about the persistence of cost-push shocks using an open economy optimal control model with Markov regime-switching and robust control. The latter is used in only one of the regimes producing relatively more persistent cost-push shocks in that regime. Conditional on being in the regime with relatively less persistence, we obtain two main results: a) underestimating the probability of switching to the regime with relatively more persistent cost-push shocks causes higher welfare losses than its overestimation; and b) the welfare losses associated with either underestimation or overestimation of such probability increase with the size of the penalty on inflation deviations from its target.
Author(s): Rodríguez Arnulfo; González Fidel; González García Jesús R.     


Summary: The choice of monetary policy is the most important concern of central banks. However, this choice is always confronted, inter alia, with two relevant aspects of economic policy: parameter instability and model uncertainty. This paper deals with both types of uncertainty using a very specific class of models in an optimal control framework. For optimal policy rates series featuring the first two moments similar to those of the actual nominal interest rates in Mexico, we show that recursive thick modeling gives a better approximation than recursive thin modeling. We complement previous work by evaluating the usefulness of both recursive thick modeling and recursive thin modeling in terms of direction-of-change forecastability.
Author(s): Rodríguez Arnulfo; Rodríguez Pedro N.     


Summary: The paper describes the dynamics of inflation in the Mexican economy from 1992 to 2006 using the New Phillips curve framework. The purpose is to identify key structural characteristics of the economy (structural parameters) that define the short-run dynamics of inflation. Results show that despite a previous history of high inflation, a hybrid version of the New Phillips curve fits the data well for the period 1992-2006. The short-run dynamics of inflation in Mexico are best described when both backward and forward looking components are considered. In addition, estimates for the sub-sample 1997-2006 show that as inflation has fallen, on average, prices remain fixed for a longer horizon, the fraction of firms that use a backward looking rule of thumb to set their price decreases and the forward looking component of the inflation process gains importance.
Author(s): Ramos Francia Manuel; Torres García Alberto     
External publications: The North American Journal of Economics and Finance, Vol. 19, No. 3, pp. 683-713.


Summary: Inflation forecasts of the Federal Reserve seem to have systematically under-predicted inflation from the fourth quarter of 1968 until Volcker's appointment as Chairman, and to systematically over-predict it afterwards until the second quarter of 1998. Furthermore, under quadratic loss, commercial forecasts seem to have information not contained in those forecasts. To investigate the cause of this apparent irrationality, this paper recovers the loss function implied by Federal Reserve's inflation forecasts. The results suggest that the cost of having inflation above an implicit time-varying target was larger than the cost of having inflation below it for the period since Volcker, and that the opposite was true for the pre-Volcker era. Once these asymmetries are taken into account, the Federal Reserve's inflation forecasts are found to be rational.
Author(s): Capistrán Carlos     
External publications: Journal of Monetary Economics, Vol. 55, pp. 1415-1427.


Summary: We analyze inflation's persistence in the 1980-2006 period for the ten largest Latin American economies using univariate time-series techniques. Although the estimated degree of inflation persistence appears to be different across countries, for the region as a whole the persistence seems to be very high. However, the estimated degree of persistence falls in all countries once we permit structural breaks in the mean of inflation. The timing of these breaks coincides with shifts in the monetary policy regimes and is similar across countries. Regardless of the changes in the mean, the degree of persistence appears to be decreasing in the region, even though for some countries persistence does not seem to be changing.
Author(s): Capistrán Carlos; Ramos Francia Manuel     
External publications: Contemporary Economic Policy, Vol.27, No. 3, pp. 349-362.


Summary: 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.
Author(s): Gaytán González Alejandro; González García Jesús R.     
External publications: Monetaria, Vol. XXX, No. 4, pp. 367-404.


Summary: This paper proposes a method for estimating the factor shares of labor and capital using cross sectional household survey data containing detailed information on household income by source. It then applies the method to the case of Mexico, a country where factor shares are almost the opposite of those in the United States. The application of this method using data from every available household survey that is representative at the national level, corresponding to the years 1968, 1977, 1984, 1989, 1992, 1994, 1996, 1998, 2000 and 2002, yields the following results: (i) factor shares in Mexico are much closer to those in the United States than the National Income and Product Accounts (NIPA) data suggest, with labor accounting for approximately 60% of income and capital for the other 40%; and (ii) factor shares in Mexico have been relatively constant over the time period analyzed. The paper then develops the implications of the differences between factor shares obtained from the NIPA data and the household survey data for some areas of economic research, including growth accounting and the analysis of the sources of growth.
Author(s): García Verdú Rodrigo     


Summary: This paper reviews the role of monetary policy in the disinflation process that has taken place in the Mexican economy in recent years. The purpose is to show that, once an economy establishes a sustainable fiscal position, an inflation targeting framework can be seen as an efficient mechanism to impose discipline on monetary policy and, thus, to reduce inflation. This paper describes the measures that were taken after the 1995 crisis to stabilize the economy and that prevented the possibility of a fiscal dominance situation from arising. Consequently, the role of monetary policy in reducing inflation is analyzed, in particular its response to different inflationary shocks. Results show that in conducting the successful disinflationary process, Banco de México's responses to inflationary shocks have been consistent with inflation targeting principles.
Author(s): Ramos Francia Manuel; Torres García Alberto     
External publications: Monetary Policy and Macroeconomic Stabilization in Latin America, R. J. Langhammer and L. Vinhas de Souza (eds.), Springer-Verlag, Kiel Institute for World Economics, pp. 1-29.


Author(s): Baqueiro Cárdenas Armando; Díaz de León Carrillo Alejandro; Torres García Alberto     
External publications: Ensayos sobre Política Económica, Banco de Colombia, No. 44, pp. 64-94. También disponible como Fear of Floating or Fear of Inflation? The Role of the Exchange Rate Pass-through BIS Papers, No. 19, pp. 338-354.


Author(s): Torres García Alberto     


Author(s): Bazdresch Santiago; Werner Wainfeld Alejandro     


Author(s): Garcés Díaz Daniel     


Author(s): Castellanos Pascacio Sara Gabriela; Camero Eduardo     


Author(s): Sánchez García Oscar     


Author(s): Guerra de Luna Alfonso; Torres García Alberto     


Author(s): Aportela Rodríguez Fernando; Ardavín Ituarte José Antonio; Cruz Aguayo Yyannú     


Author(s): Aportela Rodríguez Fernando     


Author(s): Martínez Trigueros Lorenza; Sánchez García Oscar; Werner Wainfeld Alejandro     


Author(s): Cecchetti Stephen; Flores Lagunes Alfonso; Krause Stefan     


Author(s): Díaz de León Carrillo Alejandro; Greenham Llorente Laura Elena     


Author(s): Schwartz Rosenthal Moisés; Torres García Alberto     


Author(s): Torres García Alberto