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

Alejandro Villagomez and Javier Orellana Polo
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Javier Orellana Polo: McKinsey

No 2009-01, EGAP Working Papers from Tecnológico de Monterrey, Campus Ciudad de México

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. We 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 show the central bank responds non-linearly to real exchange rate depreciations. We also show that, although the central bank has attempted to contain inflation, it has not conclusively satisfied the Taylor principle, so moderate inflation during the period may be partly a consequence of a favorable macroeconomic environment, rather than active policy.

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: 2009-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Monetary policy rules in a small open economy: an application to Mexico (2012)
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