Structural Changes in the Transmission Mechanism of Monetary Policy in Mexico: A Non-linear VAR Approach

Gaytán González Alejandro and González García Jesús R.

No 2006-06, Working Papers from Banco de México

Abstract: 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.

JEL-codes: E52 E58 F33 (search for similar items in EconPapers)
Date: 2006-04
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Citations: View citations in EconPapers (10)

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