Volume 45 Number 179,
October - December 2014
The Modus Operandi of New Consensus Macroeconomics
in Brazil, Chile and Mexico
Aída García Lázaro and Ignacio Perrotini*
Date received: April 1, 2014. Date accepted: June 24, 2014

This text provides a critical analysis of the experiences of Brazil, Chile and Mexico, countries that have adopted the inflationary targeting monetary policy espoused by New Consensus Macroeconomics (NCM). Using cointegration and error correction models, as well as a discussion of the major facts of the case, we contrast the NCM with the empirical evidence available. One essential feature of its modus operandi in these economies lies in the fact that inflation control is crucially dependent on the appreciation of the exchange rate. The essential hypothesis of the NCM cannot be accepted. Similarly, its monetary policy, in which inflation depends on the product gap, contradicts the export-led growth model adopted by these countries and is a recessive method of stabilizing prices.

Keywords: Inflation, monetary policy, exchange rate, international reserves, central bank

Macroeconomic model building since Lucas day has largely consisted
of first accepting that a real system determines equilibrium and then
inventing imperfections in the economic structure, money system, or
financial markets so that non-neutrality results. Such a model is New
Keynesian if the result is the existence of a number of equilibria that
are not necessarily at full employment and if policy is effective. Such
a model is New Classical if the result is that a unique real equilibrium
exists and if policy is ineffective.

Hyman Minsky (1992-1993: 77).


In the 1980s, conventional economics converged on the thesis that the Central Bank (CB) is the only party responsible for inflation (Hetzel, 2004). The stagflation of the 1970s led to the adoption of growth targets for the monetary supply (Friedman, 1970), whose effectiveness was crucially dependent on the stability of the real demand for money and making sure that this demand exhibited low elasticity with respect to the interest rate. However, as a result of financial innovation, starting in the 1990s, the monetary aggregates M1 and M2 became highly sensitive to the interest rate, and their relation to inflation became highly unstable. As a consequence, monetary targeting policy became useless in controlling inflation (Cecchetti and Groshen, 2009: 115) and many Latin American and European countries, among others, proceeded to peg the exchange rates of their currencies to other stronger currencies to anchor inflation. In the age of financial deregulation, however, nominal exchange rate anchors are not a viable monetary policy framework.

In this way, a dual consensus emerged in the 1990s, first regarding the benefits of low inflation macroeconomics for economic growth, employment and maximizing welfare and, second, regarding the interest rate as a price regulator to achieve low and stable inflation targets. "A particularly important development in this regard has been the adoption of ’inflation targeting’ as an approach to the conduct of monetary policy by many of the world’s central banks in the 1990s" (Woodford, 2003: 3). This New Consensus Macroeconomics (NCM) maintains that the inflation targeting model and flexible exchange rate regime with the short-term interest rate as a tool is the optimal monetary policy framework. Various central banks (CB) in Latin America, Asia, Europe and Oceania have since adopted NCM (Bernanke et al., 1999; Arestis et al., 2005; Roger, 2009).

The following text analyzes the experiences of Brazil, Chile and Mexico with inflation targeting monetary policy (ITMP). Following this introduction, we present: the NCM model and a brief overview of some relevant literature, an empirical analysis of the modus operandi of NCM in the three countries mentioned and the conclusions drawn from this analysis.


The NCM model assumes a direct relationship between aggregate demand and the interest rate. The former influences inflation through the Phillips curve with the expectations proposed by new Keynesian theory (Blanchard and Galí, 2005). The function describing how the CBs react – the Taylor rule – links interest rate movements orchestrated by the CB with how inflation evolves, thereby determining the real product, employment and the inflation rate.

Knut Wicksell (1898) was a pioneer in the theoretical construct that the interest rate regulates prices and therefore can help guarantee price targets. In the pure credit economy model proposed by Wicksell, the CB must follow a very simple rule to achieve constant price levels that stabilize inflation (Berg and Jonung, 1999): increase (decrease) the discount rate (rt) when prices increase (decrease), so that the difference between rt and the natural interest rate (rn) is a function of the discrepancy between the observed price levels (πt) and target price levels (π*):


Woodford (2003: 49), author of the most sophisticated theoretical NCM framework, maintains that Wicksell (1965 [1898], 2005 [1907]) was a prelude to the ITMP strategy that is currently in vogue. However, it should be clarified that the pure credit economy suggested by Wicksell is a theoretical abstraction with no aims at empirical relevance. In his theory, the banking system unleashes the cumulative processes of inflation and deflation when the "normal interest rate" or equilibrium rate does not prevail. On the other hand, Woodford (2003) introduced the cashless economy monetary policy model, with no banking system in which the CB would set interest rate targets to achieve the appropriate inflation target. Unlike Wicksell, Woodford (2003) believes that his model is relevant not only for theoretical purposes, but also for the practical side of monetary policy, for the "central bank to set an operational interest rate target" (op. cit.: 37).

The contemporary version of Wicksell’s idea, according to Woodford (2003), is Taylor’s rule (1993), which can be expressed as follows:


Where yt is the observed product, y* is the potential product.1 The fundamental difference between Wicksell’s rule and Taylor’s rule is that the former implies stationary prices and the second non-stationary prices.2

The canonic model of Taylor’s rule analyzes the case of a closed economy in which the CB manipulates aggregate demand so that the product gap ( yt - y* ) is consistent with the inflation target π*. Stabilizing inflation simultaneously implies a production level of full employment. This "divine coincidence" (Blanchard and Galí, 2005) leads to macroeconomic stability. In accordance with NCM principles, monetary policy has only one goal (inflation stability) and one instrument (the interest rate). Because the exchange rate regime is flexible, monetary officials do not have intermediate goals nor do they intervene in currency markets (Bernanke and Mishkin, 1997; 101, Svensson, 2001; Hüfner, 2004).

Ball (1997, 1999 and 2000) and Svensson (1998) developed the NCM model for a small, open economy, including the exchange rate (e) in the Taylor model (1993). The optimal monetary policy rule in this case is expressed as follows:


Where α and b are parameters and w is a weighting factor. In other areas, under the influence of Calvo and Reinhart (2002), empirical studies emerged analyzing the role of the exchange rate in ITMP, demonstrating that various CBs do not allow free floating currency, the so-called fear of floating phenomenon.

One of the main objectives of our scrutiny here is to analyze how the interest rate and exchange rates have performed in the framework of NCM monetary policy in small open economies (Ball, 1999). We consider an open economic model composed of an IS curve (equation 4), a Phillips curve (equation 5) and the exchange rate determined by interest rate parity (equation 6); y denotes the product, e the exchange rate, π the inflation rate and r the interest rate.




We express the Phillips curve to include the interest rate, making a recursive step from equation (6) and substituting (6.1) in (5) to obtain (5.1):



Then we come to expression (7), which is our equation for the econometric estimate to obtain the values of and γ, which denote the effect of the interest rate and the exchange rate, respectively, on inflation.


This study analyzes the experiences of Brazil, Chile and Mexico, countries that exhibited high average inflation rates during the five years prior to adopting NCM (261.7, 19.6 and 22.8%, respectively). Brazil adopted an ITMP in 1999, with a target range of 6-10%, which was reduced to 2.5-6.5% in 2008 and 4.5 +/- 2% in 2012. Ferrari and Fabres (2009) ascertain that after more than a decade of ITMP, Brazil still has a very high average inflation rate (7.1% in 1999-2008), despite the fact that its real interest rate was one of the highest in the world (9.9%). This has stifled economic growth and increased the value of public debt.

Favero and Giavazzi (2004) believe that fluctuations in the spread of the emerging market bond index (EMBI) are transmitted to the exchange rate via capital flows. When the risk of default increases, the exchange rate suffers real devaluation and the debt/GDP ratio goes up. Given that volatile exchange rates alter inflation expectations, fluctuations in the EMBI spread cause the Selic interest rate (the ITMP instrument in Brazil) to increase further. This vicious cycle leads to scenarios of fiscal dominance that prevent the CB from meeting its inflation targets. Chile adopted the ITMP in September 1990. Céspedes and Soto (2004) identified two phases in the stabilization of Chilean policy. In the first (1991-1999), monetary officials set inflation targets, as well as current account deficit targets and a managed exchange rate. It has only been during the second phase (2000-present) that a complete ITMP regime has prevailed with inflation as the only monetary policy objective. The stabilization process has been slow, mainly because there were issues of imperfect credibility at the beginning (Schmidt-Hebbel and Tapia, 2002; Schmidt-Hebbel and Werner, 2002). In this way, the Chilean CB sought to minimize losses for the product. Morandé (2002), meanwhile, studied the decade of Chilean experience with the ITMP and believes that "endemic inflation in Chile has finally been defeated," as it was, on average, "3.4% from 1999-2000," stacking up well with industrialized countries and the CB’s target. Morandé concludes that "the pass-through has been permanently lowered" (op. cit.: 623). Mexico began its transition towards the ITMP following its 1994-1995 financial crisis (Carstens and Werner, 1999). It began with a medium-term target of 3 +/- 1% in 2001. Ramos and Torres (2005) maintain that the policy of Banco de México has been consistent with ITMP principles, which has helped facilitate "successful" stabilization thanks to fiscal discipline, which has allowed for an equilibrium of low inflation through restrictive monetary policy. Mexican stabilization proves that this monetary policy can anchor inflation in a small open economy with a flexible exchange rate (Ramos and Torres, 2005: 3). Galindo and Ros (2008) and Ros (2013), on the contrary, maintain that the ITMP of Banco de México suffers from a bias towards monetary overvaluation due to asymmetrical exchange rate policies that neutralize downward pressures leading to deflation but do not neutralize monetary appreciation. In light of this, Ros (2013: 137-141) concludes that the ITMP has contributed to the productive stagnation of the Mexican economy. Finally, Mántey (2009: 73) believes that, due to increased pass-through of the exchange rate, the Banco de México "has not abandoned the currency anchor," which is why the ITMP has not been consistently applied in Mexico.


Now we will analyze the performance of the real and nominal exchange rates, inflation, international reserves (IR), the monetary base (H) and economic growth in Brazil, Chile and Mexico.

First, the relationship between the real exchange rate and inflation. The downward trend in Brazilian (starting in 2002) and Mexican (following the 1994-1995 crisis) inflation has been accompanied by the persistent appreciation of the Brazilian real and the Mexican peso. This trend has only been altered by national and international crises (see Figures 1 and 2). In Chile, inflation trends have followed a different dynamic, which may be due to the fact that the effect of the exchange rate on inflation is delayed or may be less intense. There are three time periods in which falling inflation was accompanied by currency appreciation: from March 2003 to March 2004, the end of 2008 to the beginning of 2009 and in 2012 (see Figure 3).

Second, the significant growth of international reserves. A notable feature of the modus operandi of ITMP is the trajectory of H and the tendency of IR. Recently, their growth rates have decoupled. While H has shown a nearly linear trajectory, IR has had much higher growth. This is despite the fact that from the perspective of its sources, IR is a component of H, which would seem to demonstrate the peculiar behavior of internal credit. Figures 4 and 5 reveal the behavior of IR and H in Brazil and Mexico. In both cases, the value of IR exceeds that of H. In Brazil, IR has been increasing for a while, but it was not until 2005 when its accumulation rate began to increase exponentially. In Mexico, the Banco de México decided to accumulate reserves following the 1994-1995 crisis through various currency intervention schemes implemented in 1996 and 1997. Likewise, the 2008-2009 crisis has temporarily affected the behavior of IR, as there has been slight disaccumulation both in Brazil and Mexico, although growth rates recovered after a few months. Chilean data reveals two distinct phases. From 2000 to 2007, IR levels were around 14 or 15 billion dollars, while H grew at a slightly higher rate. Starting in 2008, the accumulation rate of reserves increased and since then, both variables have grown more or less at the same rate (see Figure 6).


Figure 1. Brazil: Inflation and the Real Exchange Rate 2000(1), 2014(2)

Source: Prepared by the authors based on IBGE (Brazilian Geography and Statistics Institute) and ECLAC data.



Figure 2. Mexico: Inflation and the Real Exchange Rate, 1993(1)-2014(2)

Source: Prepared by the authors based on INEGI (Mexican Statistics Institute) and Banco de México data.



Figure 3. Chile: Inflation and the Real Exchange Rate, 2000(1)-2013(12)

Source: Prepared by the authors based on INE (Chilean National Statistics Institute) and Banco Central de Chile data.


Figure 4. Brazil: Monetary Base and International Reserves, 2001(1)-2013(10). Base Index, December 2005

Source: Prepared by the authors based on Banco Central de Brasil data.


Figure 5. Mexico: Monetary Base and International Reserves, 1993(1)-2013(12). Base Index, December 2005

Source: Prepared by the authors based on Banco de México data.


Figure 6. Chile: Monetary Base and International Reserves, 2001(1)-2013(12). Base Index, December 2005

Source: Prepared by the authors based on Banco Central de Chile data.


Third, the relationship between the nominal and real exchange rates and international reserves. The currencies of the three economies have appreciated as inflation has fallen. This has been accompanied by a significant increase in IR (see Figures 7, 8 and 9). Brazil has seen substantial decreases in its exchange rate coinciding with periods in which IR accumulation has grown (during 2004, then between 2006 and early 2008 and finally from 2009 to 2012). In Mexico, the peso appreciated constantly from 1996 to 2003, accompanied by two intervention plans that allowed Mexico to rapidly accumulate reserves, which, in the opinion of Banco de México, would give certainty to the markets. In 2003, the end of these currency interventions was announced and, among other factors, this allowed the nominal and real exchange rates to increase. The second episode of substantial appreciation was at the end of 2008, when Banco de México carried out extraordinary interventions to make the exchange rate less volatile. This was followed by various schemes to buy and sell dollars, options and other currency intervention mechanisms that allowed IR to accumulate significantly and the peso to appreciate. The dynamics in Chile were somewhat different, because the relationship between currency appreciation and IR accumulation is less evident. In the long term, on the one hand, the exchange rate has been on a downward trend, and on the other, IR accumulation has been excessive, especially since 2007.

Fourth, the slowdown of economic growth. If we compare macroeconomic performance for the 1961-1980 time period (prior to ITMP) with 1996-2013 (when ITMP was implemented), we see that economic growth has slowed down in the latter stage.3 Average annual growth rates in Brazil and Mexico were 7.4 and 6.7% from 1961-1980, respectively, with inflation at 43.4 and 11%. During the 1996-2013 time period, Brazil and Mexico grew 2.9 and 3.2%, respectively, and inflation was at 8.1 and 9.8%. In Chile, economic growth was slightly higher during 1996-2013 than 1961-1980. Similarly, inflation has fallen significantly (5 and 116%, respectively). The evidence shows that these three economies have gained price stability to varying degrees. However, looking at growth, the results have been adverse in both Brazil and Mexico.


Figure 7. Brazil: Nominal and Real Exchange Rates and International Reserves 2001(1)-2014(2)

Source: Prepared by the authors based on Banco Central de Brasil and ECLAC data.



Figure 8. Mexico: Nominal and Real Exchange Rates and International Reserves, 1993(1)-2013(12)

Source: Prepared by the authors based on Banco de México data.


Figure 9. Chile: Nominal and Real Exchange Rates and International Reserves, 2001(1)-2014(2)

Source: Prepared by the authors based on Banco Central de Chile data.



Figure 10. Annual GDP Growth Rates in Brazil, Mexico and Chile, 1961-1980 (%)

Source: Prepared by the authors based on World Bank data.



Figure 11. Annual Inflation in Brazil, Mexico and Chile, 1961-1980 (%)

Source: Prepared by the authors based on World Bank data.



Figure 12. Annual GDP Growth Rate in Brazil, Mexico and Chile, 1996-2013 (%)

Source: Prepared by the authors based on World Bank data.



Figure 13. Annual Inflation in Brazil, Mexico and Chile, 1996-2013 (%)

Source: Prepared by the authors based on World Bank data.



The Brazilian, Chilean and Mexican economies were analyzed during the decade 2003(1)-2013(12) in which ITMP has been active.4 The Phillips curve was estimated for an open economy (equation 7), assuming that the inflation rate depends on the product y, the interest rate r and the exchange rate with a lag period, as well as a white noise effect ζ. Moreover, we assume that α, ρ and γ are positive parameters:


Various proxy variables were used, as well as a price index to approximate the inflation rate, an economic activity indicator for the product, the monetary policy interest rate and the nominal exchange rate.5 The logarithms of many variables were used to standardize and reduce spread. Variables are non-stationary and their order of integration was one in all cases6 (see Table A.1 in the Appendix).

The existence of a cointegration vector was verified. Because the series are non-stationary, estimating the Phillips curve by least ordinary squares was not an appropriate econometric option. Pursuant to trace and maximum value tests, there was at least one cointegration vector in each of the countries in the sample (the tests are shown in Table A.2 of the Appendix). The cointegration vectors appear in Table 1; the presence of a long-term relationship between prices, the exchange rate, the interest rate and the product was confirmed for all three economies. The magnitude of the coefficients obtained varied among the economies, but they were relatively similar in other ways. In all three economies, prices respond with greater elasticity to varying exchange rates than to changing interest rates, as shown in the first and third rows of Table 1. In Chile, the pass-through effect has fallen considerably and now a 1% increase in the exchange rate only causes inflation to rise 0.14%. The effect of the interest rate on prices was marginal. Looking at Mexico, a 1% depreciation in the peso increases inflation by 0.40% and a 1% increase in the interest rate reduces inflation by only 0.16%. Both in Chile and Mexico, price elasticity with respect to the exchange rate is comparatively higher than price elasticity with respect to the interest rate. The situation was somewhat different in Brazil, in the sense that the elasticities of the exchange rate, interest rate and product were greater than those estimated for the Mexican and Chilean economies. Similarly, the gap between the estimated exchange rate coefficient and the interest rate is lower than in Mexico and Chile. A 1% depreciation in the Brazilian currency generates a corresponding 0.5% increase in inflation, while a 1% increase in the interest rate reduces inflation by 0.25%. This would suggest that the Brazilian CB could influence inflation with its monetary policy instruments more effectively than its Mexican and Chilean counterparts. It could be said that the Brazilian CB has a greater margin to maneuver in the sense that in Brazil, inflation is more sensitive to exchange rate and interest rate variations than in Mexico and Chile.

Looking at the results of the long-term model, Banco de México could make better use of the exchange rate as a policy instrument, because it is more effective at containing inflation. The same is true in Chile, although to a lesser extent. However, it must not be forgotten that an appreciating exchange rate depresses economic growth and employment.

The effect of the product turned out to be positive – as expected – in all cases. The Brazilian economy had the greatest price elasticity with respect to the product, followed by Chile and then Mexico. This is evidence that CBs have the flexibility to contain inflation through economic contraction, a practice frequently used. Even so, due to the effect of hysteresis, policies oriented towards persistently cooling off the economy can curb the capacity for potential economic growth (Perrotini, 2007; Ball, 2009).

To capture the short-term effects, error correction models (ECM) were estimated using the cointegration vectors found for each country as the base (see Tables 1 and 2). Short-term findings for the three economic models suggest convergence to equilibrium, as shown by the correction coefficients, which were significant, less than zero and greater than minus one. The three models passed the specification and stability tests (see Table A.3 and Figures A.1, A.2 and A.3).

Table 2 estimates reveal that price levels principally explain themselves, with a self-regressing effect. As such, the coefficients of the first and fourth price lag periods were significant in the Mexican economy, the first lag period for the Chilean economy and the first, seventh and ninth in the Brazilian model. As the models show, current price performance is closely linked to past performance, especially the immediate past, although the behavior of prices in the Brazilian economy tends to have a longer term memory. Besides the importance of past prices to explain current prices, the exchange rate and the interest rate were statistically significant in the Chilean model, while in the Mexican and Brazilian models the exchange rate, interest rate and the product were all significant. The exchange rate coefficient was the second-highest, surpassed only by the coefficients of the lagging prices. In the Mexican economic model, the first exchange rate lag period was significant, which shows how quickly this variable acts on inflation. In the Chilean economy, the third lag period was significant. By contrast, in the Brazilian model, the seventh was significant, suggesting that the exchange rate affects prices more slowly. That means that the exchange rate impacts inflation extremely quickly in Mexico and Chile, but less so in Brazil.

Looking at the effect of the exchange rate on prices, in the Mexican economy, a 1% variation in the exchange rate generates a 0.02% change in prices after the first period of change in the value of the currency. In the long term, this effect increases to 0.4%, as shown in the long-term relationships. In Chile, a 1% exchange rate variation generates a positive change of 0.03% in prices after three periods. The long-term effect amounts to 0.15% (see Table 1), marginal compared to the long-term coefficients of Mexico and Brazil. Brazilian economic performance is interesting. Although the price index is explained largely by its own past, the exchange rate has a significant effect. However, this is slower than in the Mexican and Chilean economies. Similarly, the coefficient of the exchange rate is the lowest of the three. In addition, in all three cases, the interest rate coefficient was lower than the coefficient estimated for the exchange rate. This feature persisted in both short and long-term models. In the Mexico estimate, the interest rate was significant in the seventh lag period, showing that it affects prices less quickly than the exchange rate. While the exchange rate affects prices within one lag period, the interest rate requires seven lag periods to do so. In the Chilean economy, the interest rate affects prices faster: the third and fifth lag periods were significant. However, the effect is temporary because the coefficient of the fifth lag period was of the same magnitude but opposite sign as the value of the coefficient obtained in the third lag period. Long-term estimates of price elasticity with respect to the interest rate were marginal, meaning that the short-term coefficients confirm the results obtained above.

In the Brazil estimates, the fifth lag period of the interest rate was significant at a confidence level of 90%. Finally, the economic activity indicator was significant in Mexico and Brazil and acted slower than the other variables, as is generally expected in common theoretical models (Ball, 1997: 4). Besides these relevant variables, some dummy variables were included in the models to capture any effects specific to each of the economies, such as, for example, the 2008-2009 international crisis.


The above analysis of the modus operandi of NCM in Brazil, Chile and Mexico examined the hypothesis of ITMP to determine how it stacked up to stylized facts and relevant empirical evidence. Scrutiny of the statistical data included in our econometric models will allow us to draw various inferences that cast doubt on the supposed superiority of the inflation targeting model proposed by New Consensus Macroeconomics.

First, in Brazil, Chile and Mexico, inflation was more sensitive to exchange rate fluctuations than changes in the interest rate. The long-term elasticity of prices in response to the exchange rate was significantly higher than for the interest rate. Although there are differences in terms of degree in each case, in general, the interest rate is not enough to control inflation, which is why the CBs of these countries use the exchange rate as an additional effective tool to achieve monetary policy goals. None of the CBs of these countries manage anti-inflationary policy with strict adherence to NCM, but rather use an index of monetary conditions in which the interest and exchange rate have varied weights. As such, the price stability hypothesis proposed by New Consensus Macroeconomics is rejected.

Second, CBs can de facto achieve their inflation targets through sterilized interventions in the currency exchange markets, ensuring that volatile exchange rates do not affect low and stable inflation targets. However, this introduces a veil of opacity into monetary policy and violates the precept of transparency, which, in theory, is one of the features of inflation targeting monetary policy.

Third, the empirical evidence reveals that prices are elastic with respect to economic activity in all three economies (the coefficient of the long-term Brazilian model is particularly significant). This implies that when the product contracts, this could be used to combat inflation. This recessive mechanism to achieve low and stable inflation has been used with some frequency. Besides the fact that the recessive method is derived from the NCM model – inflation depends on the product gap – it produces hysteresis effects that negatively impact long-term economic growth potential.

Fourth, if we analyze the distinctive and specific features of each of the countries studied, we see that in Brazil: a) past inflation has a stronger influence on the present, producing the effect of inertial inflation, b) price elasticity with respect to variations in economic activity is greater than in Chile and Mexico, and as such, the potential degree of conflict between inflation and economic growth appears to be higher there, c) changes in the interest rate affect inflation faster than adjustments in the exchange rate and d) given the elasticity of inflation due to fluctuating exchange rates, interest rates and the product, the Brazilian CB can more effectively regulate inflation than the CBs of Chile and Mexico, although it may be at the expense of significant losses in the product and employment.

In Chile, we find that: a) the exchange rate influences inflation more strongly than the interest rate, although the pass-through coefficient has fallen, b) the effects of a fluctuating exchange rate on prices are transmitted faster than in the Brazilian economy, c) inertial inflation is not significant and d) the appreciation of the nominal exchange rate negatively impacts the potential product.

In Mexico: a) the exchange rate more strongly and quickly influences inflation than the interest rate, b) the pass-through coefficient has fallen, but not enough to mitigate the "fear of floating" effect, c) the effect of the product gap on inflation is lower than in Brazil and Chile, d) just like the CBs in Brazil and Chile, Banco de México appears to have incentives to manage the exchange rate asymmetrically (passive response to monetary appreciation and active response to neutralize devaluation).

Fifth, ITMP focused exclusively on price stability did not insulate Brazil, Chile and Mexico from supply-side shocks between 2007 and 2009 (volatile commodity prices – both energy and food – and the financial crisis set off by the bankruptcy of the subprime mortgage market and Lehmann Brothers). These supply-side shocks were not at all related to aggregate demand, but they caused real and monetary instability and forced the CBs and governments of these countries to intervene with "discretionary" fiscal policy. Recent supply-side shocks have made it clear that the interest rate is not an efficient counter-cyclical tool and that the modus operandi of NCM has not resolved the underlying pro-cyclical tendencies endemic to the real economies and financial systems of these countries; financial fragility and restrictions on the balance of payments persist, despite a scenario of low and stable inflation.

The trade-off between the inflation model and the export-led growth models of Brazil, Chile and Mexico have led to a paradoxical return to active exchange rate policies based on NCM converted into a flexible exchange rate regime. This means that the causa causans of macroeconomic stability resides in the economic structure. In summary, there is reason to ascertain that it is essential for the CBs of the countries analyzed here to include employment and economic growth objectives in their monetary policy frameworks, as other CBs do, such as, for example, the United States Federal Reserve.



Figure A1

Source: Prepared by the authors based on econometric results.


Figure A2

Source: Prepared by the authors based on econometric results.


Figure A3

Source: Prepared by the authors based on econometric results.



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*Faculty of Economics, UNAM, Mexico. aidagarcia.lazaro@gmail.com, iph@unam.mx, respectively

1 The Taylor rule is formally similar to Wicksell’s rule if and only if .

2 Keynes (1923) advised monetary authorities to regulate the monetary supply so that "the index number of prices will never move far from a fixed point." This Keynesian "rule" is similar to Wicksell’s rule.

3 Figures 10 and 12 show the growth rates for 1961-1980 and 1996-2013, respectively, and Figures 11 and 13 show the inflation rates for the same time periods. The 1980s and first half of the 1990s were omitted due to the economic crises of these years and the lost decade.

4 The periods during which these countries transitioned into adopting this policy framework have been excluded. In other words, the convergence phase of the 1990s for Chile, the 2001 and 2002 crisis period in Brazil and the gradual transition phase in Mexico (1995-2002).

5 Information on relevant variables, such as the overall economic activity indicator (IGAE) in Mexico, the Monthly Economic Activity Indicator (IMACEC) in Chile and the economic activity index in Brazil were taken from their respective central banks.

6 To prove this non-stationarity, three unit root tests were conducted: Augmented Dickey-Fuller (ADF), Phillips-Perron (PP) and KPSS (Dickey and Fuller, 1981; Phillips and Perron, 1988; Kwiatkowski et al., 1992). The results appear in Table A.1 of the Appendix.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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