349
Views
1
CrossRef citations to date
0
Altmetric
Articles

Fighting inflation in Mexico: Theory and evidence

Pages 169-190 | Received 15 Mar 2017, Accepted 24 Jul 2018, Published online: 02 Nov 2018
 

Abstract

Mexico adopted the inflation targeting strategy in 2002, and this came together with declining inflation. According to the economic authorities, this also brought about lower pass-through of exchange rate changes into inflation. The objective of this article is to test the main hypotheses of Mexico’s prize-stabilization strategy. As a preliminary step, we show evidence whereby the interest rate has not the impact on demand assumed in the conventional view. We then estimate econometric models, which show first of all that inflation depends essentially on the evolution of labor and input costs. Then we demonstrate that higher employment and higher wages associated with higher output do not necessarily entail higher labor costs because productivity also increases when output rises. In the final section, we set forth our main conclusions, which cast doubts on some crucial aspects of the inflation targeting strategy, and propose a different interpretation about why inflation declined in this country.

Notes

1 However, as an anonymous referee pointed out to us, it seems to be the case that the inflation-targeting strategy has been helpful to keep inflation within a narrow band.

2 In the appendix, we show the behavior of some additional relevant variables.

3 Followers of Sraffa also would reject the notion that high interest rates necessarily discourage investment (Garegnani Citation1978, Citation1979).

4 The term high interest rate denotes here a domestic interest rate higher than the U.S. interest rate. Its important to clarify this, because in the previous section we gave evidence showing a fall in Mexico’s interest rate.

5 The real exchange rate θ is defined here as θ=N(p*p), where N is the nominal exchange rate, and p and p* are the domestic and the international price indexes, respectively. The hypothesis of a negative association between the interest rate and the real exchange rate has strong theoretical underpinnings, and De Jesús (Citation2016) has shown its empirical support for Mexico.

6 See López et al. (Citation2018) for a detailed discussion of the issue and an empirical test of the hypothesis for Mexico, France, and Korea.

7 To ensure statistical validity of our results, we subjected all our estimated models to misspecification tests, and all the models we include in this document were not rejected by these tests. To allow replicability, interested readers can have access to our database and our statistical results.

8 We do not estimate here the theoretical model underpinning the inflation-targeting strategy. We thank an anonymous referee who suggested that we clarify this point.

9 Using also ARDL models Nogueira (Citation2007) estimates the determinants of inflation for a group of countries, including Mexico, and found results contrary to those reported here. However, his sample-period extends from 1991 to 2005. Moreover, he does not report misspecification tests, so that we cannot actually evaluate the statistical validity of his results.

10 We thank an anonymous referee for his remark on this issue.

11 Because the series appear to have structural break, we used the Zivot and Andrews (Citation1992) test.

12 The productivity variable (Z) was included in the ARDL estimated model but does not enter the cointegration vector.

13 We do not report here the CUSUM tests, but we found with these tests that the estimated parameters are stable.

Log in via your institution

Log in to Taylor & Francis Online

PDF download + Online access

  • 48 hours access to article PDF & online version
  • Article PDF can be downloaded
  • Article PDF can be printed
USD 53.00 Add to cart

Issue Purchase

  • 30 days online access to complete issue
  • Article PDFs can be downloaded
  • Article PDFs can be printed
USD 231.00 Add to cart

* Local tax will be added as applicable

Related Research

People also read lists articles that other readers of this article have read.

Recommended articles lists articles that we recommend and is powered by our AI driven recommendation engine.

Cited by lists all citing articles based on Crossref citations.
Articles with the Crossref icon will open in a new tab.