Responses Of Interest Rates In Mexico To U.S. Monetary Policy

Abstract

This paper examines potential responses of interest rates in Mexico to the U.S. monetary policy. The regression is cointegrated in that the dependent and independent variables have a long-run stable relationship. The GARCH or ARCH model is applied to estimate regression parameters. The results show that the T-bill rate, the cost of funds rate, and the time-deposit rate in Mexico are significantly affected by the change in the U.S. federal funds rate. In addition, these interest rates are negatively associated with real M2 and real tax revenues and positively affected by the real exchange rate, real government spending, and the expected inflation rate.