Macroeconomic effects of high interest rate policy: Mexico’s experience


  • Julio Lopez Gallardo
  • Roberto Valencia Arriaga



Inflation targeting, Mexico, Interest rate, Exchange rate


We study the effects of the high interest rate policy implemented in Mexico under the inflation targeting (IT) scheme on the price level and on GDP and its components. We specify a macroeconomic model inspired by the theory of the effective demand, and on this basis we demonstrate, through comparative statics, the complex set of relationships between the variables involved, and the chain of reactions that a shock to the interest rate is likely to provoke. Our main conclusions show that an interest rate rise may be instrumental to control inflation. However, this rise contributes to appreciate the exchange rate, which is the main channel through which inflation is tamed. Currency appreciation raises the share of wages in GDP even as it reduces the debt service of firms indebted in dollars. It follows that the interest rate rise may have, under certain conditions, an indirect positive impact on output. Thus, our results diverge from those entailed by the theory that is at the basis of the inflation-targeting strategy, and even from some contemporary non-conventional approaches.


JEL Classifications: E52, E11, E12, E43


ARESTIS P. (2009), “New Consensus Macroeconomics: A Critical Appraisal”, The Levy Economics Institute Working Paper, n. 564, Bard College, Annandale-on-Hudson.

CABALLERO E. and LÓPEZ G.J. (2011) “Fiscal Policy and Private Investment in Mexico”, in Arestis P. (ed.), Microeconomics, Macroeconomics and Economic Policy: Essays in Honour of Malcolm Sawyer, Basingstoke: Palgrave Macmillan, pp. 208-227.

–––––– (2012) “Gasto público, impuesto sobre la renta e inversión privada en México”, Investigaciòn Económica, vol. 71 n. 280, pp. 55-84.

CARRASCO C. and FERREIRO J. (2013) “Inflation Targeting in Mexico”, Journal of Post-Keynesian Economics, vol. 35 n. 3, pp. 341-372.

CUEVAS V. (2008), “Inflación, crecimiento y política macroeconómica en Brasil y México: una investigación empírica”, EconoQuantum, vol. 4 n. 2, pp. 35-78.

DE JESÚS V. (2015), “Estimación de los determinantes del tipo de cambio real en México”, mimeo, Facultad de Economía, UNAM.

DORNBUSCH R. (1993), La Macroeconomía de una Economía Abierta, Barcelona: Antoni Bosch.

DOW C. and SAVILLE I.D. (1990), A Critique of Monetary Policy. Theory and British Experience, Oxford: Clarendon Press.

GALINDO L.M. and J. ROS (2006), “Banco de México: política monetaria de metas de inflación”, Economía UNAM, vol. 3 n. 9, pp. 82-88.

–––––– (2008), “Alternatives to Inflation Targeting”, International Review of Applied Economics, vol, 22 n. 2, pp. 201-214.

GANDOLFO G. (1997), Economic Dynamics, Berlin: Springer.

HEIN E. (2015), “Finance-Dominated Capitalism and Redistribution of Income: A Kaleckian Perspective”, Cambridge Journal of Economics, vol. 39 n. 3, pp. 907-934.

IBARRA M.D. (2011), Ensayos sobre economía Mexicana, Mexico City: Fondo de Cultura Económica.

IVRENDI M. and YILDIRIM Z. (2013), “Monetary Policy Shocks and Macroeconomic Variables: Evidence From Fast Growing Emerging Economies”, Economics Discussion Papers, n. 2013-61, Kiel Institute for the World Economy.

KALECKI M. (1954), “Theory of Economic Dynamics”, in Osiatynsky J. (ed.), Collected Words of Michael Kalecki, vol. II, Oxford: Oxford University Press.

LÓPEZ J.G. (1998), La macroeconomía de México: el pasado reciente y el futuro possible, Mexico City: Miguel Ángel Porrua.

LÓPEZ J.G. and SÁNCHEZ A. (2000), “Private Savings and Financial Modernization in México”, Banca Nazionale del Lavoro Quarterly Review, vol. 53 n. 214, pp. 317-339.

LÓPEZ J.G., SÁNCHEZ A. and SPANOS A. (2011), “Macroeconomic Linkages in Mexico”, Metroeconomica, vol. 62 n. 2, pp. 356-385.

LORÍA E., RAMÍREZ J. and GALÁN J. (2009), “La política monetaria y la inflacion al revés”, presented at the 2nd. Encontro Internacional da Associação Keynesiana Brasileira, 9-11 September, Porto Alegre.

MALAGAMBA A.S. (2014), “Grado de monopolio y distribución del ingreso en la industria manufacturera mexicana”, mimeo, Facultad de Economía, UNAM.

MANTEY G. (2005), “Salarios, dinero e inflación en economías periféricas: un marco teórico alternativo para la política monetaria”, in Mantey G. and Levy N. (eds.), Inflación, crédito y salarios: nuevos enfoques de política monetaria para mercados imperfectos, Mexico City: D.F. Porrua, pp. 69-99.

MANTEY G. and LÓPEZ T. (2010), “Introducción”, in Mantey G. and López T. (eds.), Política monetaria con elevado traspaso del tipo de cambio. La experiencia mexicana con metas de inflación, México City: FES-UNAM, DGAPA y Plaza y Valdés, pp. 11-19.

RAFIQ M.S. and MALLICK S.K. (2008), “The Effect of Monetary Policy on Output in EMU3: A Sign Restriction Approach”, Journal of Macroeconomics, vol. 30 n. 4, pp. 1756-1791.

SPANOS A. (1986), Statistical Foundations of Econometric Modelling, Cambridge: Cambridge University Press.

SYLOS LABINI P. (1979), “Prices and Income Distribution in Manufacturing Industry”, Journal of Post Keynesian Economics, vol. 2 n. 1, pp. 3-25.

THIRLWALL A.P. (1979), “The Balance of Payments Constraint as an Explanation of International Growth Rate Differences”, Banca Nazionale del Lavoro Quarterly Review, vol. 32 n. 128, pp. 45-53; republished (2011), PSL Quarterly Review, vol. 64 n. 259, pp. 429-438.

VALENCIA R. (2015), “Los determinantes de la inflación en México”, mimeo, Facultad de Economía, UNAM.




How to Cite

Lopez Gallardo, J., & Valencia Arriaga, R. (2015). Macroeconomic effects of high interest rate policy: Mexico’s experience. PSL Quarterly Review, 68(274).