THE TAYLOR RULE AND THE EXCHANGE RATE IN MEXICO (AN EMPIRICAL APPRAISAL)

Abstract

The objective of this paper is to analyze the relevance of the Taylor rule, including the real exchange rate, for the Mexican case. The main results indicate that a simple rule appropriately describes the reaction function of the Mexican Central Bank. The inclusion of the real exchange rate is statistically significant and has the correct signs in the parameters. That is, an appreciation of the real exchange rate induces a relaxation of the monetary policy. However, the inclusion of the real exchange rate only marginally improves the Taylor rule for a closed economy.