In this research project, we analyze the role of fiscal and monetary policies in the determination of inflation and government debt in Mexico during the 1981-2016 period.
We identify five different periods of fiscal and monetary policy interactions, which are congruent with a historical account of the Mexican monetary and fiscal policy mix.
Counterfactual exercises show that the low-frequency evolution of inflation is mainly determined by the monetary policy stance, while the low-frequency evolution of debt is mainly determined by the fiscal policy stance.
We show that if monetary dominance had prevailed throughout the whole period, average inflation would have been 13.2% rather than the 20.4% observed. On the other hand, complete fiscal dominance would have implied an average inflation of 42% and an average debt five times larger than the figure observed.
We performed a similar analysis for Brazil, Chile, Colombia, and Peru, with results available at the end of the presentation.