Monetary policy and the transmission mechanism in Mexico

Abstract

This paper describes the evolution of monetary policy implementation in Mexico from 1995 to the present. At the beginning of this period, monetary policy was set in terms of a quantitative target. This framework then gradually evolved into one in which discretionary actions of monetary policy, aimed at reaching an inflation target, took on greater relevance. Additionally, we analyse two issues that have recently generated doubts about the effectiveness of the implementation of monetary policy: the use of borrowed reserves as a policy instrument and the effectiveness of monetary policy in affecting inflation by a channel other than the exchange rate. The main results indicate that the behaviour of the real interest rate has been determined by the traditional variables that guide the discretionary actions of any central bank and that this rate has affected aggregate demand and credit in a statistically significant way.

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