Monetary policy rules in a small open economy: an application to Mexico

Rodolfo Cermeño, Alejandro Villagomez and Javier Orellana Polo
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Javier Orellana Polo: McKinsey

Journal of Applied Economics, 2012, vol. 15, 259-286

Abstract: We estimate a small-scale macro model for the Mexican economy under the New Keynesian (NK) framework and alternative interest rate rules for Mexico. With these results we evaluate the performance of the Bank of Mexico against a set of optimality principles derived in the NK literature. Our system estimation results show that the Bank of Mexico holds a preference for stabilizing not only inflation around target, but also acts to achieve an output gap close to zero. Furthermore, we find that the central bank responds non-linearly to real exchange rate depreciations. We also find that the central bank has actively attempted to neutralize demand and supply shocks through monetary policy that is consistent with the Taylor principle.

Keywords: Taylor Rule; New Keynesian; monetary policy; interest rate rules; small open economy (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (10)

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Working Paper: Monetary policy rules in a small open economy: An application to Mexico (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:cem:jaecon:v:15:y:2012:n:2:p:259-286

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