Eating Mexico`s Lunch - Federal Reserve Bank of Dallas

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Eating Mexico`s Lunch - Federal Reserve Bank of Dallas
Mexico’s Improved
Macroeconomic Policy Framework
Ed Skelton
Global Economic Forum
August 6, 2012
Overview
• Past history of macroeconomic instability
• Changes to the monetary policy framework
– Adoption of inflation targeting
– Central bank independence
• Changes to the fiscal policy framework
• Remaining challenges
– The limits of macroeconomic policy
A history of crises
(U.S.$/peso exchange rate, monthly percentage change)
Percent
30
0.18
20
0.16
10
0.14
0
0.12
-10
0.1
-20
0.08
-30
0.06
-40
0.04
-50
0.02
-60
1970
0
1975
1980
1985
1990
1995
2000
2005
2010
The rise and fall of inflation
(12-month inflation rate)
Percent
200
0.18
180
0.16
160
0.14
140
0.12
120
0.1
100
0.08
80
0.06
60
40
0.04
20
0.02
0
1970
0
1975
1980
1985
1990
1995
2000
2005
2010
Crises hurt!
(Real GDP per capita growth, PPP-adjusted)
Percent
15
1976 crisis
14
10
12
5
10
8
0
6
-5
4
-10
1982 crisis
-15
1970
1975
1980
2
Tequila crisis
1985
1990
Global financial crisis
1995
2000
2005
0
2010
Central banking conventional
wisdom circa 1995
• Central bank independence
– Focus on longer term objectives
• Inflation targeting
– Price level is what central banks ultimately control
– Objective against which an independent central
bank can be held accountable
• Taylor Rule as guide to policy decisions
Independent central banks deliver
better inflation outcomes
(Average annual inflation rate, 1955-88)
Percent
9
8
ESP
NZL
ITL
7
NOR/SWE/FRA
6
GBR
AUS
5
BEL
4
DEN
JPN
CAN
NED
USA
SUI
DEU
3
2
1
0
0
1
2
3
Index of central bank independence
4
5
Independence
“El Estado tendrá un banco central que será autónomo en el
ejercicio de sus funciones y en su administración. Su objetivo
prioritario será procurar la estabilidad del poder adquisitivo
de la moneda nacional, fortaleciendo con ello la rectoría del
desarrollo nacional que corresponde al Estado. Ninguna
autoridad podrá ordenar al banco conceder financiamiento.”
– Article 28 of the Constitution of the Mexican United
States, August 20, 1993
Inflation targets and outcomes:
The early days
Percent
60
(12-month inflation rate)
50
40
Actual inflation rate
30
20
10
Target inflation rate
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Inflation targets and outcomes:
More recent results
(12-month inflation rate)
Percent
7
6
Actual inflation rate
5
4
3
2
1
0
2003
Target inflation rate
2004
2005
2006
2007
2008
2009
2010
2011
2012
Independence good for price stability
Average annualized
monthly inflation
Standard
deviation
Prior to independence (1970 -1994)
43.3%
42.9
Since independence (1994 – current)
11.1%
15.5
Since inflation targeting (2001 – current)
4.4%
2.4
1995 – 2000
22.1%
21.0
Period
Mexico grows a yield curve
Percent
60
1995
50
40
30
20
10
0
O/N
28D
3M
6M
1Y
3Y
5Y
10Y
20Y
30Y
100Y
Mexico grows a yield curve
Percent
60
1995
1999
50
40
30
20
10
0
O/N
28D
3M
6M
1Y
3Y
5Y
10Y
20Y
30Y
100Y
Mexico grows a yield curve
Percent
60
1995
1999
50
2000
40
30
20
10
0
O/N
28D
3M
6M
1Y
3Y
5Y
10Y
20Y
30Y
100Y
Mexico grows a yield curve
Percent
60
1995
1999
2000
2003
50
40
30
20
10
0
O/N
28D
3M
6M
1Y
3Y
5Y
10Y
20Y
30Y
100Y
Mexico grows a yield curve
Percent
60
1995
1999
50
2000
2003
40
2004
30
20
10
0
O/N
28D
3M
6M
1Y
3Y
5Y
10Y
20Y
30Y
100Y
Mexico grows a yield curve
Percent
60
1995
1999
2000
2003
2004
2006
50
40
30
20
10
0
O/N
28D
3M
6M
1Y
3Y
5Y
10Y
20Y
30Y
100Y
Mexico grows a yield curve
Percent
60
1995
1999
2000
2003
2004
2006
2010
50
40
30
20
10
0
O/N
28D
3M
6M
1Y
3Y
5Y
10Y
20Y
30Y
100Y
Mexico grows a yield curve
Percent
60
1995
1999
50
2000
2003
40
2004
2006
30
2010
2012
20
10
0
O/N
28D
3M
6M
1Y
3Y
5Y
10Y
20Y
30Y
100Y
Fiscal reforms
• Budget and Fiscal Responsibility Law (2006)
– Balanced budget rule
• Integral Fiscal Reform (2007)
– Improving tax collection
• ISSSTE Law (2007)
– More sustainable pension system
• Governmental Accounting Law (2008)
– Harmonization of budget and accounting codes
Fiscal policy has remained disciplined
(Deficit as a share of GDP)
Percent
4
2
0
-2
-4
-6
1997
1999
Primary balance
2001
2003
Budget deficit
2005
2007
2009
Public sector borrowing req.
2011
National debt small
(Debt as a share of GDP)
100
80
60
40
20
0
Mexico’s debt mostly held domestically
100%
80%
60%
40%
20%
0%
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Domestically held
Foreign held
Flight to
quality
Reserves used to absorb shock
and then grew
Bil. U.S.$
160
Collapse of Lehman Brothers
150
140
Reserve
accumulation
strategy
130
120
110
Defend peso
100
90
80
70
60
2007
Pay down debt
2008
Reverse transfer of dollars
2009
2010
2011
2012
Premium flare-up was small for Mexico…
(Interest rate spread)
Basis points
1600
Tequila crisis
1400
1200
Asian crisis
1000
800
2008-9 crisis
600
400
200
0
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
…and less dramatic than similar countries…
(Interest rate spread)
Basis points
1000
800
600
400
Latin
America
200
Russia
Brazil
Mexico
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
…less risky than (peripheral) Europe too?
(Interest rate spread)
Basis points
4000
3500
3000
2500
Greece
2000
1500
1000
Portugal
Ireland
Spain
Italy
Mexico
500
0
2008
2009
2010
2011
2012
…less risky than (peripheral) Europe too?
(Interest rate spread)
Basis points
1600
1200
800
Portugal
400
Ireland
Spain
Ireland
Mexico
0
2008
2009
2010
2011
2012
Ties that bind
(Manufacturing production)
Index, 2003=100
130
120
1986: Mexico
Joins GATT
1994: NAFTA
2001: China joins WTO
110
100
90
80
U.S.
70
Mexico
60
50
40
1980
1985
1990
1995
2000
2005
2010
Independence not as good for growth
Average annualized
quarterly growth
Standard
deviation
Prior to independence (1970 -1994)
2.7%
5.4
Since independence (1994 – current)
2.5%
6.3
Since inflation targeting (2001 – current)
1.9%
5.5
1995 – 2000
3.5%
7.7
Period
Obstacles to development
•
•
•
•
•
•
Human capital (education) deficit
Barriers to entry & FDI
Inefficient institutions
PEMEX
At root: Labor productivity deficit
2012
– Presidential election
– War on drug cartels
Conclusions
• Major improvements in Mexico’s macroeconomic
policy framework
– Monetary policy:
• Central bank independence
• Inflation targeting
– Fiscal policy
• Balanced budget rule
• Paying off
• Institutions are important
• Much more to be done!

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