Template-Type: ReDIF-Paper 1.0
Author-Name: Ana Aguilar
Author-X-Name-First: Ana
Author-X-Name-Last: Aguilar
Author-Name: Carlos Cantú
Author-X-Name-First: Carlos
Author-X-Name-Last: Cantú
Author-Name: Claudia Ramírez
Author-X-Name-First: Claudia
Author-X-Name-Last: Ramírez
Title: It takes two: Fiscal and monetary policy in Mexico
Abstract: We model the interaction between fiscal and monetary policy and qualify their effects in a semi-structural small open economy model calibrated for Mexico. In our model, fiscal and monetary policy follow rules tied to specific targets. We estimate how fiscal policy, through deficits and public debt accumulation, and monetary policy, through the interest rate, directly affect the economy. We study the nature of the feedback between policy decisions and examine their indirect effects through the sovereign risk channel. We find that the response of monetary policy to stabilise the economy after a shock depends on how strict is the fiscal rule. A loose fiscal stance pushes a tighter monetary policy stance. Instead, the economy recovers faster when monetary and fiscal policy complement each other.
Length: 33 pages
Creation-Date: 2022-05
File-URL: https://www.bis.org/publ/work1012.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1012.htm
File-Format: text/html
Number: 1012
Keywords: monetary policy, fiscal policy, sovereign risk premium, policy rules
Classification-JEL: E52, E58, H5, H63
Handle: RePEc:bis:biswps:1012