Reducing Inflation through Inflation Targeting: The Mexican Experience

This paper reviews the role of monetary policy in the disinflation process that has taken place in the Mexican economy in recent years. The purpose is to show that, once an economy establishes a sustainable fiscal position, an inflation targeting framework can be seen as an efficient mechanism to impose discipline on monetary policy and, thus, to reduce inflation. This paper describes the measures that were taken after the 1995 crisis to stabilize the economy and that prevented the possibility of a fiscal dominance situation from arising. Consequently, the role of monetary policy in reducing inflation is analyzed, in particular its response to different inflationary shocks. Results show that in conducting the successful disinflationary process, Banco de México’s responses to inflationary shocks have been consistent with inflation targeting principles.