How relevant is monetary policy to explain Mexican unemployment fluctuations?

Islas-Camargo, Alejandro and Cortez, Willy W. (2011): How relevant is monetary policy to explain Mexican unemployment fluctuations?

Abstract

In this paper we analyze the effects of a monetary policy shock on Mexican unemployment rates. Unlike previous studies we re-estimate unemployment rates so that these alternative rates are comparable to those of the OECD member countries. We find that in response to tightening monetary policy, unemployment increases with a characteristic hump-shaped pattern found in other studies. Our empirical results indicate that unemployment elasticity is low and yet the velocity of adjustment to return to the initial point is rather high. We interpret these findings as being the result of two characteristics of Mexico’s labor market: (i) high labor regulation (which includes labor intervention in hiring-firing decisions), and (ii) the existence of a large informal sector and low enforcement of labor regulation.

• Item Type: MPRA Paper
• Language: English
• Keywords: unemployment rates; structural VAR; monetary policy; Mexico
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

Alcaraz, Chiquiar and Ramos-Francia (2008) “Diferenciales salariales intersectoriales y el cambio en la composición del empleo urbano de la economía mexicana en 2001-2004”, Banco de México, Working papers No. 2008-06.

Alcaraz, Carlo (2009) “Informal and Formal Labour Flexibility in Mexico” Desarrollo y Sociedad, Primer Semestre de 2009, pp. 115-143. 27

Alexius, Annika and Bertil Holmlund (2007), “Monetary Policy and Swedish Unemployment Fluctuations,” Institute for the Study of Labor, IZA Discussion Paper No 2933, July.

Banxico (2002) “Informe sobre la Inflación Octubre – Diciembre 2001” http://www.banxico.org.mx/documents/%7B15AA921B-8C80-3651-02F2-B0AE5A7BB9E6%7D.pdf

_______________ “Programa Monetario para 2002”, . http://www.banxico.org.mx/documents/%7B15AA921B-8C80-3651-02F2-B0AE5A7BB9E6%7D.pdf

Blanchard, Oliver and Diamond P. (1989), “The Beveridge Curve.” Brooking Papers on Economic Activity I, 1-60

Blanchard, Oliver, and D. Quah (1989), “The Dynamic Effect of Aggregated Demand and Supply Disturbances,” American Economic Review, vol. 79, 655-673

Cantillon, Richard (1732-34) “Essai sur la Nature du Commerce en Generale” first published in 1755.

Chavarin, R. (2001) “El costo del desempleo medido en producto. Una revisión empírica de la ley de Okun para México”, El trimestre Económico. Vol. LXVIII, Núm. 270, FCE, México.

Chick, Victoria (1983) “Macroeconomics after Keynes: A Reconsideration of The General Theory” Cambridge, MA: The MIT Press.

Fisher, (1911) “The Purchasing Power of Money,” Fleck, Susan and Sorrentino, Constance (1994) “Employment and Unemployment in Mexico´s Labor Force”, Monthly Labor Review, November.

Friedman, Milton (1968) “The role of Monetary Policy,” American Economic Review, March, Vol. 68, pp. 1-17.

Friedman, Milton (1976) “Inflation and Unemployment,” Nobel Memorial Lecture, December 13, 1976.

Gaytán, Alejandro and Jesus Gonzalez (2006) “Structural Changes in the Transmission Mechanism of Monetary Policy in Mexico: A Non-linear VAR Approach”, Jesus Gonzalez-Garcia, April 2006, Banco de Mexico Working Paper No. 2006-06 28

Gill, Indermit; Claudio E. Montenegro and Dörte Dömeland, editors (2001) “Crafting Labor Policy: Techniques and Lessons Learned from Latin America” The World Bank, Washington D. C.

Gonzalez-Anaya, José Antonio (2002) “Labor Market Flexibility in Thirteen Latin American Countries and the United States: Revisiting and Expanding Okun Coefficients”, Center For Research On Economic Development And Policy Reform, Stanford University, June.

Grier, Robin and Kevin B. Grier (2006) “On the real effects of inflation and inflation uncertainty in Mexico”, Journal of Development Economics, Vol. 80, pp. 478-500.

Heckman, James and Carmen Pagés (2000), “The Cost of Job Security Regulation: Evidence From Latin American Labor Markets”, National Bureau of Economic Research, NBER Working Paper No 7773, June.

Heckman, James and Carmen Pagés (2001), “The Cost of Job Security Regulation: Evidence from Latin American Labor Markets”, Economía, Volume 1, Number 1, Fall 2000, pp. 109-144, Published by Brookings Institution Press

Hume, [1752] “On Money” published as Essays: moral, political and literary, (1985) ed. Miller, Indianapolis, Liberty Fund.

Hyford, M.D. (2005), “Fiscal Policy and National Saving,” Applied Economics, vol. 37, 981-992.

Hyeon-Seung, H. (2005), “A simple test of exogeneity for recursively structural VAR model”, Applied Economics, 37, 2307-2313

Lipsey, Richard (1960) “The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1862-1957: a further analysis”, Economica New Series, Vol. 27, Num. 105, pp. 1-31.

Loboguerrero, Ana Maria and Ugo Panizza (2009) Macroeconomic Shocks, Inflation, and Latin America's Labor Market, Kiel Institute for World Economics,

Loria, E. and Ramos, M. (2007) “La ley de Okun: Una relectura para México, 1970-2004”, Estudios Económicos, Vol. 22, Núm. 001, 19-55 29

Lucas Jr., Robert E. (1973) "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.

Maloney, William (2009) “Mexican labor markets: protection, productivity and power” in Santiago Levy and Michael Walton, editors No Growth without Equity?: Inequality, Interests and Competition in Mexico.

Marshall, Adriana (2004) “Labour market policies and regulations in Argentina, Brazil and Mexico: Programmes and impacts”, Consejo Nacional de Investigaciones Científicas y Técnicas and Instituto de Desarrollo Económico y Social, Buenos Aires, Argentina.

Martin, Gary (2000) “Employment and Unemployment in Mexico in the 1990s” Monthly Labor Review, November, pp. 3-18.

Mendoza, Alfonso (2003), “The inflation-output volatility tradeoff and exchange rate shocks in Mexico and Turkey”, Central Bank Review, vol. I, pp. 27-51.

Messmacher M. and Werner A. (2002), “La Política Monetaria en México: 1950-2000,” Gaceta de Economía, ITAM. Tomo I, 19-59

Newcomb, Simon (1885) “Principles of Political Economy”, New York, Harper and Brothers, Franklin Square.

Pastor, J. and Villagómez A. (2007), The Structural Budget Balance: A Preliminary Estimation for Mexico, Applied Economics, vol. 39, 1599-1607.

Phillips, A. W. (1958) “The Relationship between Unemployment and the Rate of Change of MoneyWages in the United Kingdom 1861–1957.” Economica 25 (November): 283–99.

Ravn, M. and S. Simonelly (2008), “Labor Market Dynamics and the Business Cycle: Structural Evidence for the United States,” Scandinavian Journal of Economics, vol. 109(4), 743-777.

Revenga, Ana and Riboud, Michelle (1993) “Unemployment in Mexico: its characteristics and determinants”, Policy Research Working Paper No 1230, The World Bank, December. Risso, W. Adrián and Edgar J. Sanchez (2009) "Inflation and Mexican economic growth: long-run relation and threshold effects," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 1(3), pages 246-263, May 30

Shapiro, M. D. and Watson, M. (1988), “Sources of Business Cycle Fluctuations,” Stanley Fischer, e.d., NBER Macroeconomics Annual. Cambridge, Mass.: Press.

Samuelson, Paul and Robert Solow (1960) “Analytical Aspects of Anti-Inflation Policy”, The American Economic Review, Vol. 50, No. 2, Papers and Proceedings of the Seventy -second Annual Meeting of the American Economic Association (May, 1960), pp. 177-194.

Sanchez, Manuel (2005), “The Recent Stabilization Experience in Mexico,” Cato Journal, vol.25, No. 1, 55-77.

Sims, C. A. (1980), “Macroeconomics and Reality,” Econometrica, vol.48, 1-49

Taylor J. (1994) “The Inflation/Output Variability Trade-off Revisited”, in Goals, Guidelines and Constraints Facing Monetary PolicyMakers. Proceedings of the Conference Series No. 38, pages 21–38. Federal Reserve Bank of Boston.