Monetary policy and regional economic performance in Mexico: A structural panel VAR approach

Víctor Hugo Torres‐Preciado

Growth and Change, 2021, vol. 52, issue 1, 195-223

Abstract: The aim of this article is to investigate the dynamic effects of monetary policy shocks on economic activity and aggregate price levels across Mexican states. To do this, a recursive structural panel VAR model is implemented as proposed by Pedroni which allows for regional heterogeneity and structural identifying restrictions of common monetary policy shocks. Empirical evidence suggests a common monetary policy shock to short‐term interest rates induces significant cross‐state variation in prices and output level responses. Additional analysis indicates that structural features, such as the industry mix and the small versus large firm mix, are possible sources of the observed cross‐state variation influenced by interest rates and credit channels. We conclude that the observed differentiated regional impacts are sufficiently important to justify rethinking Mexico's current monetary policy framework in order to explicitly consider a regional view.

Date: 2021
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