From debt crisis to tequila crisis: inflation stationarity through Mexico's turbulent decades

Abstract

The volatility of Mexican inflation throughout the 1980s' debt crisis and the 1994 tequila crisis provides an interesting backdrop to test for structural breaks and inflation stationarity in a developing country context. By allowing for multiple breaks, four inflationary regimes are identified during the period 1980 to 2004. Initial unit root tests reject stationarity; however, by incorporating structural break analysis, inflation is found to be I(0). The structural break analysis and the stationarity analysis point to monetary and fiscal determinants of inflation.

Keywords:

• Mexico
• inflation
• structural breaks

JEL Classification:

• E5
• O5

Notes

¹ We set the trimming parameter to , which sets the maximum number of breaks equal to five and corrects for serial correlation by incorporating Andrews' (1991) robust SEs.