Currency Exchange Rate Policy, Inflation Targeting

Inflation Targeting is one of updated and maneuverable frameworks of monetary policy. There are a growing number of central banks of developed and developing countries whose Monetary and Exchange Rate Policies are based on this framework. But presently so few literatures focuses on this subject, especially Mexican Monetary and Exchange Rate Policy under Inflation Targeting. Therefore, this thesis is written for this purpose. It is completed on the basic of Monetary Policy Report and Inflation Report Quarterly of Mexico and a vast of related literatures through econometric testing on statistical data monthly and quarterly from Bank of Mexico.The analytical conclusions are followings: (1) as radical reform of exchange rate system, Mexico began its informal inflation targeting period or transition period in which the fluctuations of exchange rate and money base are the two dominated factors influencing on inflation and price level. At the same time, the main monetary and exchange rate policies have been changed into the zero average reserve requirement system and auction mechanism of dollar option. Till 2000, Bank of Mexico made an announcement of inflation targeting because of improved internal and external economy environment. In other words, Mexico began its period of formal inflation targeting. (2) the achievements of Mexican Inflation Targeting are very notable including controlling the levels of inflation, interest rate and exchange rate, improving the profitability and soundness of banking and financial sector, diversifying the financing ways of private sector, resuming the confidence of internal and external investors on Mexican national economy and creditability of Bank of Mexico. (3 ) Although the results of Inflation Targeting in Mexico is remarkable especially on controlling the inflation which is the core target, there are many ways to ameliorate including increasing the independence of Bank of Mexico, improving information disclosure of monetary policy, diversifying the monetary policy tools, strengthening the function of Bank of Mexico in supporting the financial and credit market development and financing private sector etc.