Motivated by the dollarization debate in Mexico, we estimate an identified vector autoregression for the Mexican economy using monthly data from 1976 to 1997, taking into account the changes in the monetary policy regime which occurred during this period. We find that 1) exogenous shocks to monetary policy have had no impact on output and prices, 2) most of the shocks originated in the foreign sector, 3) disturbances originating in the U.S. economy have been a more important source of fluctuations for Mexico than shocks to oil prices. We also study the endogenous response of domestic monetary policy by means of a counterfactual experiment. The results indicate that the response of monetary policy to foreign shocks played an important part in the 1994 crisis.
JEL classification: E52, E58, F30
Key words: monetary policy, VAR, Mexico, financial crisis
The authors are grateful to Mario Crucini, Jordi Galí, Eric Leeper, Sergio Luna, Alejandro Werner, Tao Zha, an anonymous referee, and especially Chris Sims for helpful suggestions. This paper was originally prepared for the conference “Optimal Monetary Institutions for Mexico,” which was organized and sponsored by the Instituto Tecnológico Autónomo de México (ITAM). Comments received during that conference, as well as during the Federal Reserve Bank of Cleveland/JMCB conference “Global Monetary Integration,” and presentations at ITAM and Banamex have greatly improved the paper. Any remaining errors are the authors’ responsibility.
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