Mexico's Monetary Policy Communication and Money Markets

BBVA Working Paper, No.15/15 May 2015International Journal of Economics and Finance

29 Pages Posted: 30 Apr 2018 Last revised: 3 Aug 2021

See all articles by Alicia García-Herrero

Alicia García-Herrero

Bruegel; Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS); Natixis

Eric Girardin

University Aix-Marseille 2 - GREQAM

Arnoldo Lopez Marmolejo

BBVA Economic Research Department

Date Written: May 1, 2015

Abstract

Central bank communication is becoming a key aspect of monetary policy. How much financial markets listen and, possibly, understand Banco de Mexico's communication on its monetary policy stance should be a key consideration for the central bank to further modernize its monetary policy toolkit. In this paper, we tackle this issue empirically by using our own index of the tone of communication based on Banco de Mexico's speeches and statements and find that money markets do not only listen but they also understand the stance of monetary policy conveyed in the central bank's words. Regarding the ability to listen, first, we find that both the volatility and volume in the money market rates change right after communication from Banco de Mexico's governing body. As for the markets' understanding, we find a statistically significant rise in money market interbank rates the more hawkish communication is. All in all, our results show strong evidence of effective oral and written communication from the Central Bank towards Mexico's money markets.

Keywords: Mexico monetary policy communication; money market

JEL Classification: E52, E58, E43

Suggested Citation

Garcia-Herrero, Alicia and Girardin, Eric and Lopez Marmolejo, Arnoldo, Mexico's Monetary Policy Communication and Money Markets (May 1, 2015). BBVA Working Paper, No.15/15 May 2015International Journal of Economics and Finance, Available at SSRN: https://ssrn.com/abstract=3160530 or http://dx.doi.org/10.2139/ssrn.3160530

Alicia Garcia-Herrero (Contact Author)

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS) ( email )

IAS 2019, Lo Ka Chung Building,
Lee Shau Kee Campus, HKUST
Clear Water Bay, Kowloon
Hong Kong

Natixis ( email )

France

Eric Girardin

University Aix-Marseille 2 - GREQAM ( email )

Centre de la Vieille Charité
Marseille, 13 002
France

Arnoldo Lopez Marmolejo

BBVA Economic Research Department ( email )

Mexico

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