Policy mix in a small open emerging economy with commodity prices
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 de...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
| Published: |
Elsevier
2023-03-01
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| Series: | Latin American Journal of Central Banking |
| Subjects: | |
| Online Access: | http://www.sciencedirect.com/science/article/pii/S2666143822000369 |
| _version_ | 1827986943389990912 |
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| author | Marine C. André Alberto Armijo Sebastián Medina Espidio Jamel Sandoval |
| author_facet | Marine C. André Alberto Armijo Sebastián Medina Espidio Jamel Sandoval |
| author_sort | Marine C. André |
| collection | DOAJ |
| description | 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. |
| first_indexed | 2024-04-09T23:39:21Z |
| format | Article |
| id | doaj.art-55d9cf688d824fe29783a1c87a8efcf4 |
| institution | Directory Open Access Journal |
| issn | 2666-1438 |
| language | English |
| last_indexed | 2024-04-09T23:39:21Z |
| publishDate | 2023-03-01 |
| publisher | Elsevier |
| record_format | Article |
| series | Latin American Journal of Central Banking |
| spelling | doaj.art-55d9cf688d824fe29783a1c87a8efcf42023-03-19T04:38:33ZengElsevierLatin American Journal of Central Banking2666-14382023-03-0141100082Policy mix in a small open emerging economy with commodity pricesMarine C. André0Alberto Armijo1Sebastián Medina Espidio2Jamel Sandoval3Corresponding author.; Banco de México, Dirección General de Investigación Económica, MexicoBanco de México, Dirección General de Investigación Económica, MexicoBanco de México, Dirección General de Investigación Económica, MexicoBanco de México, Dirección General de Investigación Económica, MexicoThe 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.http://www.sciencedirect.com/science/article/pii/S2666143822000369C61C68E17E47E52E62 |
| spellingShingle | Marine C. André Alberto Armijo Sebastián Medina Espidio Jamel Sandoval Policy mix in a small open emerging economy with commodity prices Latin American Journal of Central Banking C61 C68 E17 E47 E52 E62 |
| title | Policy mix in a small open emerging economy with commodity prices |
| title_full | Policy mix in a small open emerging economy with commodity prices |
| title_fullStr | Policy mix in a small open emerging economy with commodity prices |
| title_full_unstemmed | Policy mix in a small open emerging economy with commodity prices |
| title_short | Policy mix in a small open emerging economy with commodity prices |
| title_sort | policy mix in a small open emerging economy with commodity prices |
| topic | C61 C68 E17 E47 E52 E62 |
| url | http://www.sciencedirect.com/science/article/pii/S2666143822000369 |
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