Monetary policy in open emergent economies with weak financial markets: the case of Mexico and its effect on the banking system

Noemi Levy Orlik and Jorge Bustamante

Chapter 7 in Central Banking and Monetary Policy Implementation, 2025, pp 147-170 from Edward Elgar Publishing

Abstract: In this chapter we show that the central bank interest rate has a distributive effect that promotes increasing financial rents to the banking sector. In emerging countries with underdeveloped production structures and current accounts deficits, the pass-through effect of the exchange rate over domestic prices is extremely high. Thus, the need for high differential in domestic interest rates with foreign ones overvalues the exchange rate, raises financial gains, and prevents domestic financial market development. In this context, we show through an econometric model that monetary regulation operations (capital inflows sterilization) of the Bank of Mexico to fix the interest rate and achieve its inflation targeting, promotes increasing financial rents that distribute income in favor of the banking sector, especially if foreign banks dominate due to their bargaining power vis-à-vis the public authorities.

Keywords: Inflation targeting; Central banking; Income distribution; Interest rate; Huber–White estimation (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035302796
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