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It takes two: Fiscal and monetary policy in Mexico

Ana Aguilar, Carlos Cantú and Claudia Ramirez Bulos

No 1012, BIS Working Papers from Bank for International Settlements

Abstract: We model the interaction between fiscal and monetary policy and qualify their effects in a semi-structural small open economy model calibrated for Mexico. In our model, fiscal and monetary policy follow rules tied to specific targets. We estimate how fiscal policy, through deficits and public debt accumulation, and monetary policy, through the interest rate, directly affect the economy. We study the nature of the feedback between policy decisions and examine their indirect effects through the sovereign risk channel. We find that the response of monetary policy to stabilise the economy after a shock depends on how strict is the fiscal rule. A loose fiscal stance pushes a tighter monetary policy stance. Instead, the economy recovers faster when monetary and fiscal policy complement each other.

Keywords: monetary policy; fiscal policy; sovereign risk premium; policy rules (search for similar items in EconPapers)
JEL-codes: E52 E58 H5 H63 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2022-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dem, nep-dge, nep-mac and nep-mon
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