Monetary Policy in Liberalized Financial Markets: The Mexican Case

This paper by Santiago Capraro and Carlo Panico examines the conduct of monetary policy and the institutional organization of economic policy in Mexico during the years of financial liberalization, beginning in the early 1980s. It argues that financial liberalization has favored monetary and financial stability but has reduced investment and negatively impacted Mexico’s productive structure and international competitiveness, with especially negative effects on public investment. The paper discusses how the institutional organization can be reformed to avoid further weakening Mexico’s productive structure and international competitiveness.

Abstract

The paper examines the conduct of monetary policy and the institutional organization of economic policy in Mexico during the years of financial liberalization and the outgrowth of the financial industry. It argues that they have favored the monetary and financial stability at the cost of reducing investment and negatively affecting the strength of the productive structure and the international competitiveness of the Mexican economy. The paper argues that these negative results will eventually make the present conduct of monetary policy unable to pursue the monetary and financial stability of the economy. Unlike other outstanding critical literature, the emphasis of our evaluation of the negative consequence of the current policy is on the reduction of public investment that the institutional organization of economic policy produces, rather than the over-valuation of the real exchange rate. The paper finally discusses how the institutional organization can be reformed to avoid weakening further the productive structure and the international competitive of the Mexican economy

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