Conduct of Monetary Policy

Two views seem to have clearly emerged about the conduct of monetary policy in the country. There are several analysts who think that there is now enough evidence to suggest that the monetary policy stance of the State Bank needs to be eased.

With import growth contained and a steady downward trend achieved in (non-food, non-energy) core inflation, the SBP is in a position to reverse its tight policy and ease interest rates as early as the first quarter of 2007.

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Has Monetary Policy Been So Bad That It Is Better to Get Rid of It? The Case of Mexico

MANY LATIN AMERICAN COUNTRIES are considering adopting the U.S. dollar as legal currency, and some, like Ecuador, have taken concrete steps in that direction. Proponents of dollarization generally hold the view that domestic monetary policy has been the primary cause for the economic instability experienced by these countries in the past three decades. Yet, at least for Mexico, very few empirical studies have tried to identify the role of monetary policy.

The existing empirical literature on Mexican monetary policy consists mainly of single equation estimations (see Calvo and Mendoza 1996 and Kamin and Rogers 1996), or of reduced-form vector autoregressions (see Copelman and Werner 1995 and Hernandez 1999).(1) The first class of models is silent on the impact of monetary policy on the rest of the economy. The second class of models, by definition, cannot identify monetary policy. In addition, all previous literature has either ignored the issue of changes in regime, or has confined itself to the study of monetary policy within regimes. This despite the fact that some of Mexico’s major crises occurred during the passage from one regime to another. A proper evaluation of the impact of monetary policy on the Mexican economy requires that these critical transition periods are considered.

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International monetary policy: a global Taylor rule

Abstract

John Taylor’s rule for setting interest rates provides a framework for studying the global monetary policy generated by individual countries pursing their own policy goals. The study reflects the global nature of monetary policy by modeling an aggregate short-term interest rate as a function of measures of worldwide inflation and the GDP gap. Multiple specifications are estimated to correspond to past studies of the U.S. relationships between these variables. The authors find that Taylor rule is a useful tool for characterizing the global monetary environment as his equation provides a good fit to the data in every specification explored by the authors. However, the international response to inflation is slightly less robust despite claims of inflation targeting by the bulk of the larger economies in the sample. (JEL F33)

Introduction

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