Analysis of the structure of the Mexican economy indicates that information and policy instruments available to the government, although seemingly crude and inaccurate, are sufficient to achieve a reasonable degree of macroeconomic stability. Since the early 1950s, Mexico has experienced growth with respectable stability; the stability exists because public expenditure and private autonomous expenditure have moved in offsetting ways. The burden of adjustment, however, has been carried by private investment rather than by public expenditure. The level of private investment has been controlled by manipulation of the level of reserves that private financial institutions are required to deposit in the central bank, Banco de Mexico, and this manipulation is based on the monitoring of two variables: the rate of growth of the money supply and the rate of change of foreign exchange reserves. A model is developed to measure the power of the reserve ratio to affect the level of investment and GNP. 71 pp.
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