Economic Policy-Making with Limited Information : The Process of Macro-Control in Mexico.

by John Koehler

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An analysis of the manner in which the Mexican government has achieved macroeconomic stability in spite of the seemingly inaccurate and crude information and policy instruments at its disposal. This stability is due, in part, to the public expenditure and private autonomous expenditure having moved in offsetting ways. However, this pattern is not the result of fiscal policy, since the information on which such a policy would have to be based is lacking. Thus, it is private investment that is being forced to adjust to the movements of public expenditure. The only policy tool that is manipulated frequently and with sufficient power to control private investment this effectively is the ratio of reserves private banks are required to deposit with the central bank, Banco de Mexico. Because the government deficit is closely linked to the supply of money, and the supply of money is, in turn, closely linked to the balance of payments, the need for a change in policy is quickly signaled to the authorities. In Mexico's circumstances, buying a monetary control capability appears adequate to achieve reasonable short-run stability. However, the policy will not be adequate forever. 75 pp. Bibliog.

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