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Macroeconomic effects of high interest rate policy: Mexico’s experience

PSL Quarterly Review

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Field Value
 
Title Macroeconomic effects of high interest rate policy: Mexico’s experience
 
Creator Lopez Gallardo, Julio
Valencia Arriaga, Roberto
 
Subject inflation targeting, Mexico, interest rate, exchange rate
E52, E11, E12, E43
 
Description We study the effects on the price level and on GDP and its components, of the high interest rate policy implemented in Mexico under the inflation targeting (IT) scheme. We specify a macroeconomic model inspired by the theory of the effective demand, and on this basis we demonstrate, through comparative statics, the complex set of relationships between the variables involved, and the chain of reactions that a shock to the interest rate is likely to provoke. Our main conclusions show that the interest rate rise may be instrumental to control inflation. However, this rise contributes to appreciate the exchange rate, which is the main channel through which inflation is tamed. Currency appreciation raises the share of wages in GDP even as it reduces the debt service of firms indebted in dollars. It follows that the interest rate rise may have, under certain conditions, an indirect positive impact on output. Thus, our results diverge from those entailed by the theory that is at the basis of the inflation-targeting strategy, and even from some contemporary non-conventional approaches.JEL Classifications: E52, E11, E12, E43
 
Publisher Economia civile
 
Contributor —
 
Date 2015-10-27
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
—
 
Format application/pdf
 
Identifier http://annalidibotanica.uniroma1.it/index.php/PSLQuarterlyReview/article/view/13169
 
Source PSL Quarterly Review; Vol 68, No 274 (2015)
PSL Quarterly Review; Vol 68, No 274 (2015)
2037-3643
ISSN 2037-3635
 
Language eng
 
Relation http://annalidibotanica.uniroma1.it/index.php/PSLQuarterlyReview/article/view/13169/12983
 
Rights Copyright (c) 2016 Julio Lopez Gallardo, Roberto Valencia Arriaga
http://creativecommons.org/licenses/by-nc-nd/4.0