Abstract

RODRIGUEZ, Violeta. The Limits of Exchange Rate Stability in Mexico. Prob. Des [online]. 2015, vol.46, n.181, pp.49-74. ISSN 0301-7036.

This text analyzes conditions for stability in a dynamic simulation model of Banxico's sterilized interventions in the time period 1976-2013. The analysis reveals that two of the most striking vulnerabilities of this strategy were: a) the potential for the external reference interest rate for Mexico to rise above the domestic rate and b) the risk that oil revenue in the country would fall. In light of this change, Banxico is faced with the policy dilemma of choosing between tightening monetary restrictions to increase the domestic interest rate above the external rate or doing the opposite, because both options could counterbalance these vulnerabilities. The former would come at the cost of shifting the burden of the losses from the adjustment to non-financial sectors in the country, while the second would distribute these losses progressively.

Keywords : Exchange rate stability; exchange rate policy; dynamic simulation model; interest rate; exchange rate.

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