Explaining Inflation with a Classical Dichotomy Model and Switching Monetary Regimes: Mexico 1932-2013

Garcés Díaz Daniel

No 2017-20, Working Papers from Banco de México

Abstract: 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.

Keywords: Money Velocity; Exchange Rate; Inflation; PPP; Fiscal Deficit; Cointegration; Monetary Regimes; Unbalanced Regressions (search for similar items in EconPapers)
JEL-codes: C32 E41 E42 E52 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.banxico.org.mx/publications-and-press/ ... -FD04073FD461%7D.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdm:wpaper:2017-20

Access Statistics for this paper

More papers in Working Papers from Banco de México Contact information at EDIRC.
Bibliographic data for series maintained by Subgerencia de desarrollo de sistemas (iec-sbgdesdesistemas-subgerente04b@banxico.org.mx).