The control of inflation in Mexico

Abstract

We argue that, after the adoption of the inflation targeting regime in Mexico, the interest rate is a necessary but not sufficient condition to control inflation due to its relationship with the monetary base and the exchange rate. To document our argument, we empirically analyze the impact of the various instruments that Mexican monetary policy has had to achieve price stability in the period 2008-2022. The results confirm the stabilizing role of the interest rate, but the breach of the canonical model in an open economy due to the causal relationship between the exchange rate and prices. Therefore, it is necessary to include exchange conditions in the modus operandi of the central bank.