Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/174473
Authors: 
Garcés Díaz, Daniel G.
Year of Publication: 
2017
Series/Report no.: 
Working Papers, Banco de México 2017-20
Abstract: 
This paper applies a novel approach to study the impact of different shocks on the price level. It uses a classical dichotomy model with monetary policy regime shifts at known dates. First, there was a regime dominated by money, afterwards a regime driven by the exchange rate and a third one with inflation targeting. The result is a CVAR with constant long-run parameters but regime-dependent adjustment coefficients. This overcomes the challenge of explaining, within a single theoretical framework, inflation dynamics in Mexico since the country abandoned the gold standard. The model encompasses known results, offers new insights and clarifies decades-old debates on key aspects of the inflationary process such as inertia, the role of money, the exchange rate pass-through and the impact profile of other variables. The model proposed here is very parsimonious, it does not require inflation lags nor dummy variables. It also displays a very good pseudo out-of-sample forecasting performance
Subjects: 
Money Velocity
Exchange Rate
Inflation
PPP
Fiscal Deficit
Cointegration
Monetary Regimes
Unbalanced Regressions
JEL: 
C32
E41
E4
E52
Document Type: 
Working Paper
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