Monetary and Fiscal Policies Interactions in Mexico: 1981-2016

This paper analyzes the role of monetary and fiscal policies in the determination of inflation and government debt in Mexico during the 1981 - 2016 period. The analysis is done with an estimated Markov-switching DSGE model... [ view full abstract ]

This paper analyzes the role of monetary and fiscal policies in the determination of inflation and government debt in Mexico during the 1981 - 2016 period. The analysis is done with an estimated Markov-switching DSGE model and the results are compared with an historical account of the Mexican monetary and fiscal policy mix during the past 35 years. Monetary policy is classified as active when the interest rate response to inflation is larger than one and passive otherwise. Fiscal policy is classified as active when the debt process is non-stationary and passive otherwise. The policy space allows to distinguish four policy regimes: Passive Monetary and Passive Fiscal (PM/PF), Passive Monetary and Active Fiscal (PM/AF), Active Monetary and Passive Fiscal (AM/PF) and Active Monetary and Active Fiscal (AM/AF). For the case of Mexico, five different periods of fiscal and monetary policies interaction configurations are identified, which are congruent to the macroeconomic environment, as well as the institutional and macro policy changes that Mexico had during the last 35 years: 1 ) 1981Q1 - 1998Q3: PM/AF, 2) 1989Q1 - 1995Q3: AM/PF, 3) 1995Q4 - 2001Q3: PM/AF, 4) 2001Q4 - 2008Q1: AM/PF and 5) 2008Q2-2015Q4: AM/AF.