Objective:

Based upon a monetary conditions index, to evaluate the effectiveness of the exchange rate and the interest rate in determining the monetary stance in Mexico.

Methodology:

The relative effects of the interest rate, the real exchange rate, and inflation expectations are established using a vector autoregressive (VAR) model.

Results:

The results obtained show a 1:9.5 relationship between the exchange rate and the interest rate and their effect on inflation.

Originality:

The incorporation of inflation expectations in the determination of the weights allows us to capture the lasting impact of monetary adjustments on the real economy.

Limitations:

The definition of the monetary policy profile through the index is general and limited by economic shocks. It does not encompass all the dimensions of monetary policy and the interaction of other determining factors.

Conclusions:

The monetary conditions index reflects the profile of monetary policy and the preeminence of the interest rate in determining the monetary stance.

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