10 Mexico’s Monetary Policy Framework Under a Floating Exchange Rate Regime

Abstract

The recent currency and financial crises in emerging markets have reignited the debate on viable exchange rate regimes for small, open economies. One common element in all of these crises was the adherence to a predetermined exchange rate. Thus, several analysts have concluded that only under very specific and demanding conditions might there be a comfortable middle ground between a floating exchange rate and the adoption of a common currency. In Latin America this polarization in the choice of exchange rate regimes is clearly represented by the different paths taken by Argentina and Mexico. After more than four years of experience with a floating exchange rate regime, Mexico provides an interesting case study for other emerging economies considering moving toward a more flexible exchange rate regime.