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     

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     

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     

Author(s): Castellanos Pascacio Sara Gabriela     

Summary: The currency and financial crises experienced by the European Monetary System in 1992, by Mexico in 1994-95 and the recent emerging market crisis of 1997-1999 have reignited the debate on the viable exchange rate regimes for small open economies and, in particular, for emerging markets. After more than four years with the floating exchange rate regime, the Mexican experience provides an interesting case of study for other emerging economies considering the possibility of moving towards a more flexible exchange rate regime. In this paper we provide an overview of the transition towards the floating exchange rate regime, the functioning of this system in Mexico, the current monetary policy framework and the behavior of the economy in recent years.

Author(s): Carstens Carstens Agustín; Werner Wainfeld Alejandro     

Summary: Formal work on credit concentration risk has focused mainly on applying portfolio theory to portfolios of traded fixed income assets. No comparable counterpart has emerged however, for dealing with portfolios of everyday bank loans for which information compatible with portfolio theory is difficult or too costly to obtain. Based on the default behavior of the portfolio, as represented by default probabilities of the loans and their covariance matrix, a model is developed which relates a measure of concentration of the loan portfolio with value at risk in order to guarantee capital adequacy within a specified confidence level.

Author(s): López Castañón Calixto; Márquez Diez-Canedo Javier     

Author(s): Schwartz Rosenthal Moisés; Galván Sybel     

Author(s): Gelos Gaston; Werner Wainfeld Alejandro     

Author(s): Schwartz Rosenthal Moisés     

Author(s): Mateos Hanel Calixto; Gaytán González Alejandro     

Author(s): Werner Wainfeld Alejandro; Milo Caraza Alexis     

Author(s): Werner Wainfeld Alejandro     

Author(s): Carstens Carstens Agustín; Reynoso del Valle Alejandro     

Author(s): Mateos Hanel Calixto; Schwartz Rosenthal Moisés     

Author(s): Román Aguilar Fernando; Vela Dib Abraham     

Summary: A large number of hypotheses have been offered to explain the causes and circumstances of the December 1994 devaluation of the Mexican peso and the economic crisis that ensued. Some of them are based on ideas and data handled loosely and/or with no perspective, and frequently arrive at the exact opposite conclusion as that which would have been supported by the available information. This paper deals with some of the most often repeated of these conjectures and confronts them with what actually happened. It begins by reviewing the situation of the Mexican economy prior to the devaluation and then surveys, as possible causes for the crisis, the following: an overvalued currency, lax central bank credit, misleading and unequal information, politically motivated fiscal stimulus, insufficient domestic savings, and what is known in the literature as the "over-borrowing syndrome".

Author(s): Gil Díaz Francisco; Carstens Carstens Agustín     

Author(s): Sod Hoffs Gabriel     

Author(s): Murillo Garza José Antonio     

Author(s): Martínez Trigueros Lorenza     

Author(s): Reynoso del Valle Alejandro     

Author(s): Yesin Toledo Rubén     

Author(s): Ortiz Martínez Guillermo; Solís Leopoldo     

Author(s): Ortiz Martínez Guillermo     

Author(s): Ortiz Martínez Guillermo     

Author(s): Ortiz Martínez Guillermo     

Author(s): Guerrero Víctor M.; Vera y Ferrer Gabriel     

Author(s): Ize Alain     

Author(s): Ortiz Martínez Guillermo