Monetary and Fiscal Policies Interactions in Mexico

In this project, we analyze the role of fiscal and monetary policies in the determination of inflation and government debt in Mexico during the 1981-2016 period.

We identify five different periods of fiscal and monetary policy interactions, which are congruent with a historical account of the Mexican monetary and fiscal policy mix.

Counterfactual exercises show that the low-frequency evolution of inflation is mainly determined by the monetary policy stance, while the low-frequency evolution of debt is mainly determined by the fiscal policy stance.

We show that if monetary dominance had prevailed throughout the whole period, average inflation would have been 13.2% rather than the 20.4% observed. On the other hand, complete fiscal dominance would have implied an average inflation of 42% and an average debt five times larger than the figure observed.

We performed a similar analysis for Brazil, Chile, Colombia, and Peru, with results available at the end of the presentation.

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