Intervention instruments, demand, output, and inflation

Abstract

This paper estimates a SVAR to assess Mexican monetary policy responses and effects. To build it Gali & Monacelli (2005) New Keynesian Open Economy Model represents the main tool, but investment and international reserves are artificially added because of its empirical relevance to explain Mexican economy. Using monthly data from January 2002 to September 2018, evince that Mexican government intervenes markets using interest rate and international reserves. Interest rate prioritizes exchange rate stability, but it barely affects it. Both instruments effects on aggregate demand are limited, as income is the main explanatory variable according to variance decomposition, suggesting fiscal policy relevance to explicate aggregate demand.