Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/336364 
Year of Publication: 
2023
Citation: 
[Journal:] Latin American Journal of Central Banking (LAJCB) [ISSN:] 2666-1438 [Volume:] 4 [Issue:] 1 [Article No.:] 100082 [Year:] 2023 [Pages:] 1-19
Publisher: 
Elsevier, Amsterdam
Abstract: 
The article analyzes the interaction between monetary and fiscal policy in Mexico. We calibrated a semi-structural model for a small open economy, based on Aguilar and Ramírez-Bulos (2018), for Mexico by using quarterly data from 2001Q1 to 2019Q4. The fiscal policy block models the fiscal deficit depending on output, an endogenous sovereign risk premium, a state-owned oil company, and public debt dynamics with domestic and foreign components. We assumed a fiscal rule whereby the deficit has an upper bound. The monetary policy follows a Taylor rule. We study the effects of different shocks on the economy, such as a drop in commodity prices, an expansion of public spending, an increase in the risk premium, a hike in the interest rate, and depreciation of the real exchange rate. We show that, remarkably, the risk premium channel transmits threats from the fiscal block to the monetary block, calling for the central bank to stabilize inflation. By contrast, starting at the economy's steady state, an exogenous monetary policy shock affects the fiscal block mainly through the interest rate's influence on the debt service, prompting a fiscal response to stabilize deficit.
Subjects: 
Commodity prices
Emerging economy
Policy mix
Risk premium
Small open economy
JEL: 
C61
C68
E17
E47
E52
E62
E63
F41
H62
H63
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Article

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