Inflation targeting or fear of floating in disguise: the case of Mexico

Abstract

This paper uses simple analytics to show the similarities and differences between inflation targeting and fear of floating in emerging markets. The analytics provide well-defined predictions for the behaviour of exchange rates and relevant monetary variables under both regimes. This allows us to distinguish clearly one regime from another and empirically test whether or not a country that targets inflation also exhibits a fear of floating. We analyse the recent experience in Mexico where the authorities now claim to be following an inflation targeting regime. Mexico is also one of the countries claimed to exhibit a fear of floating. Using data from Banco de México, we first confirm that by standard measures Mexico exhibits fear of floating. Second, we show that Mexico is inflation targeting and discuss the relationship and test for a distinction between the two. Finally, we conclude by discussing our results and their implications for other emerging market inflation targeters. Copyright © 2004 John Wiley & Sons, Ltd.

Does Exchange Rate Pass-Through Respond to Measures of Macroeconomic Instability?

“…Gagnon and Ihrig (2004) and Choudhri and Hakura (2006). 4 For an overview on the recent developments of the Mexican economy see Ball and Reyes (2004).…”

Exchange Rate Passthrough Effects and Inflation Targeting in Emerging Economies: What is the Relationship?

“…Given that under an IT regime the nominal exchange rate is supposed to float freely, the interventions observed under IT might be classified as “fear of floating,” even though these are justified. Ball and Reyes (2004) show that Calvo and Reinhart’s (2002) metric to classify countries as either fear of floaters, fixers (fixed exchange rate regimes), or floaters (flexible exchange rate regimes) can actually lead inflation targeting (IT) regimes to be misclassified as fear of floaters.…”

Inflation Targeting and the Consistency of Monetary Policy Decisions in Mexico: an Empirical Analysis with Discrete Choice Models

“…Nonetheless, there is also growing evidence that the convergence to a low and stable inflation environment has reduced the exchange rate pass-through to prices. See Garces (1999), Baqueiro et al (2003), Ball and Reyes (2004), Gaytán-González and Gonzales-García (2006) and Ibarra (2008) among others.…”

“…In our empirical analysis we take 1999 to be the year in which Mexico clearly adopted an explicit inflation targeting policy (Carstens and Werner, 1999;Martínez et al, 2001;Schmidt-Hebbel and Werner, 2002;Cuevas-Camarillo, 2003;Ball and Reyes, 2004). 11 Mexico currently has in place the main components of a full-fledged inflation targeting regime, including a floating exchange rate, an independent monetary authority that sets inflation as its only policy objective, the absence of other nominal anchors, and implementation of monetary policy within a transparent framework in which communication with the public plays a key role (Galindo and Ros, 2008;Ortiz Martinez, 2008).…”

“…See Garces (), Baqueiro et al . (), Ball and Reyes (), Gaytán‐González and Gonzales‐García () and Ibarra () among others.…”