Estimating the Bank of Mexico’s reaction function in the last three decades: A Bayesian DSGE approach with rolling-windows |
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| Institution: | 1. Department of Finance, National Sun Yat-sen University, Kaohsiung, Taiwan;2. School of Business Administration, Southwestern University of Finance and Economics, Sichuan, China;1. Assistant Professor Department of Computer Science and Engineering Anna University Regional Office, Madurai, Tamilnadu, India;2. Professor Department of Information Technology K.L.N.College of Engineering, Pottapalayam, Sivaganga, Tamil Nadu, India;1. HEC Montréal and Deloitte LLP, Canada;2. UQAM School of Management, Canada;3. HEC Montréal, Canada;4. Canada Research Chair in Risk Management, HEC Montréal, Canada;1. School of Business, Pusan National University, Busan 46241, Republic of Korea;2. Graduate School of Arts and Sciences, International Christian University, Tokyo 181-8585, Japan;3. Department of Computer Science, University College London, London, United Kingdom;4. Department of Mathematics, School of Mathematical and Physical Sciences, University of Sussex, Brighton BN1 9QH, United Kingdom;1. ISEG/UL – Universidade de Lisboa, R. Miguel Lupi 20, 1249-078 Lisbon, Portugal;2. Centre for Globalization and Governance, Nova School of Business and Economics, Campus Campolide, Lisbon 1099-032 Portugal;3. REM – Research in Economics and Mathematics, UECE – Research Unit on Complexity and Economics, R. Miguel Lupi 20, 1249-078 Lisbon, Portugal |
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| Abstract: | This paper uses a small open economy Dynamic Stochastic General Equilibrium (DSGE) model to investigate how Mexico’s central bank has conducted its monetary policy in the period 1995–2019. The main objective of the paper is to document the systematic changes in the Bank of Mexico’s reaction function by analyzing possible shifts in the parameters of the policy rule. The central bank’s policy is modeled using a Taylor rule that relates the nominal interest rate to output, inflation, and the exchange rate. I employ Bayesian computational techniques and conduct rolling-window estimations to explicitly show the transition of the policy coefficients over the sample period. Furthermore, the paper examines the macroeconomic implications of these changes through rolling-window impulse–response functions. The results suggest that the Bank of Mexico’s response to inflation has been steady since 1995, while the response to output and the exchange rate has decreased and stabilized after 2002. |
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| Keywords: | Small open economy Monetary policy Bayesian estimation DSGE model |
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