Jesus Gonzalez-Garcia

Structural Changes in the Transmission Mechanism of Monetary Policy in Mexico: A Non-linear VAR Approach

In this paper we present a first approach to the study of the transformation in the transmission mechanism of monetary policy that has taken place in Mexico in recent years. For this purpose, we use a non-linear VAR model that allows for regime shifts. The comparison of the different regimes identified leads to the following main findings: a) there was a major structural change in the transmission mechanism around January 2001, date that coincides with the formal adoption of the inflation targeting framework; b) after this change, fluctuations in the real exchange rate have had smaller effects on the process of price formation, the formation of inflation expectations and the nominal interest rate; c) also, there have been stronger reactions of the nominal interest rate to increases in the output gap and the rate of inflation; and d) the movements of the nominal interest rate have a more effective influence on the real exchange rate and the rate of inflation.

State-Owned Banks and Fiscal Discipline

State-owned banks may help to soften the financing constraints of public sector entities and consequently become a factor that hampers fiscal discipline. Using a panel dataset, we find that a larger presence of state-owned banks in the banking system is associated with more credit to the public sector, larger fiscal deficits, higher public debt ratios, and the crowding out of credit to the private sector. These results suggest that the lending practices of state-owned banks should be carefully assessed in any strategy to pursue fiscal discipline.

Fiscal Multipliers in the ECCU

The multipliers of taxes, and government consumption and investment expenditure for the Eastern Caribbean Currency Union (ECCU) are estimated using vector autoregression models with panel data. The impact and long-run multipliers are below unity, suggesting that a great extent of the intended impulse ends up expanding imported demand. The long-run multipliers of taxes and consumption expenditure are non-different from zero statistically, while public investment has a long-run multiplier of 0.6. The results suggest that countercyclical policies to stimulate growth should focus on public investment.

Benford's Law and Macroeconomic Data Quality

This paper examines the usefulness of testing the conformity of macroeconomic data with Benfords law as indicator of data quality. Most of the macroeconomic data series tested conform with Benfords law. However, questions emerge on the reliability of such tests as indicators of data quality once conformity with Benfords law is contrasted with the data quality ratings included in the data module of the Reports on the Observance of Standards and Codes (data ROSCs). Furthermore, the analysis shows that rejection of Benfords law may be unrelated to the quality of statistics, and instead may result from marked structural shifts in the data series. Hence, nonconformity with Benfords law should not be interpreted as a reliable indication of poor quality in macroeconomic data.

The IMF's Data Dissemination Initiative After Ten Years

The Data Dissemination Initiative was launched in the mid-1990s as part of a broader internationally-agreed-upon initiative to strengthen transparency and promote good governance practices by establishing standards and codes. Ten years later, the initiative is viewed as an integral part of the international financial architecture, and is considered to have improved the functioning of international financial markets and contributed to global financial stability. This volume reviews certain aspects of the development of and experience with the initiative over the past decade, and concludes by reflecting on potential challenges ahead and possible enhancements.

The IMF's Reserves Template and Nominal Exchange Rate Volatility

The effects of the adoption of the IMFs International Reserves and Foreign Currency Liquidity Data Template on nominal exchange rate volatility are investigated for 48 countries. Estimation of panel data models indicates that nominal exchange rate volatility decreases following dissemination of reserves template data while the effects of indebtedness and reserve adequacy on volatility exhibit statistically significant changes.

The 1989-94 Consumption Boom in Mexico: An Analysis of Cointegration using Regime Shifts

We argue that the consumption boom observed in Mexico between 1989 and 1994 can be accurately identified and evaluated if the model for the cointegration relationship between consumption and income allows regime shifts. Using Markov-switching models, we show that the introduction of the program for stabilization and economic reform at the end of 1987 led to a shift from a regime with a cointegrating vector with unitary income elasticity to another involving an elasticity close to 1.3. Also, we show that the vector with unitary elasticity was re-established when a currency and financial crisis erupted at the beginning of 1995.

Uncertainty about the Persistence of Periods with Large Price Shocks and the Optimal Reaction of the Monetary Authority

Uncertainty about the persistence of periods characterized by large price shocks is an important aspect of monetary policy. This type of uncertainty posed some difficulties for central banks in 2004. This paper formalizes the treatment of this type of uncertainty by solving an optimal control problem in which the economy randomly alternates between two regimes characterized by different magnitudes of price shocks. By using an open economy model, we find that the optimal policy rule is both regime-contingent and robust. In particular, we find that: a) the optimal reaction of the interest rate is dependent on both the current regime and on the difference in the magnitude of the shocks between regimes; b) the alternation between regimes leads to more aggressive policy reactions with respect to inflation and the second lag of the real exchange rate; and c) after a robust selection of transition probabilities, the min-max probability of switching to the regime with large price shocks increases when such regime is more harmful. In general, cautious behavior renders smaller losses than recklessness for the central bank. This result argues in favor of caution over recklessness in the formulation of monetary policy when there is uncertainty about the persistence of periods with large price shocks

The Effects of Annual Inflation Targets on the Conduct of Monetary Policy During the Disinflation Process in Mexico

We study the effects of the inflation targets established for December of each year on the conduct of monetary policy. The hypothesis tested postulates that the annual inflation targets could have produced some seasonality in the operation of the overnight interbank funds market in which the government funding rate is determined. To test this hypothesis a series of Taylor rules are estimated using linear and nonlinear methods. The results show that the inflation targets established for the end of year have special importance in the determination of the interest rate during the middle months of each year, and in the last quarter the focus of attention shifts to the target corresponding to December of the next year. Also, the results suggest that during the disinflation period, the short term interest rate has shown less inertia and more intense reactions to inflationary pressures during the central months of each year.