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Prepared by Enrique Flores and Francisco Vazquez-Ahued.
This is different from the HP filter approach, which implicitly assumes a model with cyclical and structural shocks that follow a random walk.
Different values of lambda were tried, always obtaining a negative output gap.
Mexico officially adopted an inflation targeting regime in 2000. In order to estimate the inflation objective prior to that year, we used the inflation target estimates presented by Galindo and Ross (2005) from 1995 to 1999. For the period between 1990 and 1994, we assumed that the target was equal to 80 percent of the realized y/y inflation. We also assumed that the policy interest rate was equal to the 28 days CETES rate before the introduction of a policy rate by Banxico.
The graphs shown in panel 2 correspond to a lambda equal to 1,600. We also estimated the models setting lambda equal to 5,600 and 10,000, with results similar to those using the univariate filter.
A robustness test was performed for starting in 1997 in order to have two full economic cycles. The results did not change significantly.
The sample was limited to 2009 in order to avoid the end-point problem mentioned above.
Our results would not change significantly if we assume a 60 percent share of labor, as found by Garcia-Verdu (2005).