2156-8557-1-PB

2156-8557-1-PB - The Journal of Applied Business Research...

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The Journal of Applied Business Research Volume 19, Number 2 15 Responses Of Interest Rates In Mexico To U.S. Monetary Policy Yu Hsing, (Email: [email protected]), Southeastern Louisiana University Abstract This paper examines potential responses of interest rates in Mexico to the U.S. monetary policy. The regression is cointegrated in that the dependent and independent variables have a long-run stable relationship. The GARCH or ARCH model is applied to estimate regression parameters. The results show that the T-bill rate, the cost of funds rate, and the time-deposit rate in Mexico are significantly affected by the change in the U.S. federal funds rate. In addition, these interest rates are negatively associated with real M2 and real tax revenues and positively affected by the real exchange rate, real government spending, and the expected inflation rate. 1. Introduction he Mexican economy has gone through spectacular changes during the last two decades. The passage of the NAFTA has benefited its export, agricultural, manufacturing and other related sectors as evi- denced by the increase in employment from 32.83 million in 1993 to 39.07 million in 1999 and the decline in the unemployment rate from 2.40% to 1.72% during the same period. Thanks to the central bank‟s rela- tively independent role in recent years, the inflation rate dropped from 38.93% in 1988.Q1 to 0.68% in 2001.Q3. Af- ter the peso crisis beginning in late 1994, peso‟s value has been relatively stable during and after the Asian financial crisis and has risen from 10.02 pesos per U.S. dollar in 1998.Q4 to 9.22 in 2001.Q3 while most of other foreign cur- rencies depreciated in value. While the U.S. experienced the longest economic expansion, Mexico faced with eco- nomic ups and downs due to financial, fiscal, peso, political and other crises. The financial market has become rela- tively stable as evidenced by the movements of the T-bill rate, which reached a high of 134.47% in 1988.Q1 and de- clined to 8.74% in 2001.Q3. In order to stimulate the sluggish economy, since January 2001 the Federal Reserve Bank has dropped the federal funds rate eleven times from 6.75% to 1.75%. Facing with economic downturns, many foreign countries have followed suit to reduce key interest rates. The time-deposit rate in Mexico declined from a high of 106.45% in 1988.Q1 to a low of 3.84% in 2001.Q3. A lower deposit rate is expected to reduce the incentive to save and increase current consumption. On the other hand, because Mexico has a relatively high saving rate (21.5% in 2000), the loss of interest income for savers is expected to reduce consumption spending. The cost of funds rate dropped from 125.19% in 1988.Q1 to 7.74% in 2001.Q3. Due to a lower cost of borrowing by households and firms, it is expected to increase aggregate demand and real output. The purpose of this paper is to determine whether interest rates in Mexico respond to U.S. monetary policy
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This note was uploaded on 02/13/2012 for the course ECON 101 taught by Professor Malrani during the Spring '05 term at Bunker Hill.

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2156-8557-1-PB - The Journal of Applied Business Research...

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