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The Need for Monetary Reform in Mexico
By Manuel Sanchez
Introduction
There is perhaps no more striking feature in Mexico's economic history than the persistent instability of the general level of prices. For any sufficiently long period for which there are reliable statistics, high and variable inflation is a consistent phenomenon. As a result of this behavior, living standards have been severely damaged, as reflected in several indicators, including low economic growth, frequent business fluctuations, sharp declines in real wages, and the worsening of the distribution of income.
This dismal record has prevented Banco de México, in operation since 1925, from attaining a solid reputation in terms of its commitment to price stability. During most of the 20th century, the country's monetary policy was conducted under a variety of predetermined exchange rate systems, which invariably ended in failure, with major devaluations of the peso against the U.S. dollar and consequent outbreaks of inflation. Following the 1995 crisis, the central bank has applied a flexible exchange rate policy, and since 1999 has moved toward an inflation-targeting approach. Even though inflation has recently fallen to rates not seen for several years, it is still high in terms of international standards.
Furthermore, the episodes of instability during the 1990s have given way to proposals in favor of extreme fixed exchange rate regimes, including a currency board and the adoption of the dollar as the country's legal tender. Although such ideas have lost ground in light of the recent progress in domestic stabilization and the abandonment, mainly for fiscal reasons, of the Argentine currency board, they cannot be rejected a priori.
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