Research

Publications

Global Supply Chain inflationary pressures and monetary policy in Mexico (joint with Daniel Ventosa-Santaulària and J. Eduardo Valencia). Forthcoming in the Emerging Markets Review (Revised Manuscript).

Abstract: In this paper, we examine the impact of stress in the global supply chains on inflation and monetary policy in Mexico, a representative emerging market economy. Using non-linear local projections, we estimate the degree of monetary policy tightening required in a high-stress supply chain environment and compare it to that in a low-stress environment. We instrument the monetary policy shocks with shocks to the federal funds rate. Results suggest that in a high-stress regime, the effect of an increase in the monetary policy interest rate on inflation over a one-year period is reduced considerably. We argue that this reduction is due to the slow response of inflation expectations to a monetary policy tightening in a high-stress regime. Furthermore, raising the interest rate has an effect on producer price inflation, a channel that is absent in a low-stress regime. This finding highlights the role of monetary policy in stabilizing inflation when facing supply shocks that are not necessarily permanent.

Capital Flows to Emerging Markets and Global Risk Aversion during the COVID-19 Pandemic (with Carlos Alba, Gabriel Cuadra and Raúl Ibarra). Forthcoming in the International Journal of Finance and Economics. Banco de México Working Papers. No. 2021-17.

Abstract: This paper analyses recent changes in the relative importance of the determinants of capital flows to emerging market economies. For this purpose, we estimate vector autoregressive (VAR) models for the period 2009-2021. Based on these models, we estimate the effects on debt flows from shocks to their determinants. Then, we quantify the contribution of each of the variables included in the model to explain the evolution of these flows in each month of the sample through a historical decomposition analysis. The main results indicate that the contribution of global risk aversion to explain the evolution of debt flows increased during March 2020 compared to the past, although    its relative importance has decreased since, particularly as central banks in systemically important economies restored liquidity and the performance of financial markets improved. 

Explaining Apparent deviations from Covered Interest Parity: Evidence from Mexico. Revista Mexicana de Economía y Finanzas. January - March 2023. (Previously Circulated as: Peso-Dollar Forward Market Analysis: Explaining Arbitrage Opportunities during the Financial Crisis. Banco de México Working Papers. No. 2014-09.)

Abstract: This paper tests and quantifies the effects of reduced funding liquidity conditions on the covered interest parity (CIP) relating the U.S. Dollar-Mexican Peso market. To this end, a vector error-correction model is estimated. Results suggest, first, that apparent deviations from the CIP disappear when measures of funding liquidity for market participants are considered. Second, the exchange rate forward premium and the U.S. interest rate adjust towards the CIP cointegrating relationship. Finally, a structural analysis shows that deviations from CIP are mostly determined by shocks on the funding liquidity in the U.S. while funding liquidity conditions in Europe also have a non-negligible role. From the policy perspective, the paper underlies the relevance of funding liquidity measures when assessing whether the foreign exchange market works efficiently. As ever, there are some caveats in the analysis to consider. First, funding liquidity measures may shift from non- to stationary regimes. Second, market participants may not able to fund their liquidity at reference rates. The financial series present considerable ARCH-like behaviour, this may be a source of information to explore in further work.

Identifying Dornbusch's Exchange Rate Overshooting with Structural VECs: Evidence from Mexico (with Carlos Capistrán and Daniel Chiquiar). International Journal of Central Banking. December 2019. (Banco de México Working Papers version) 

Abstract: In this paper we use data from Mexico to identify Dornbusch's (1976) exchange rate overshooting hypothesis. We specify and estimate a structural cointegrated VAR that considers explicitly the presence of a set of long-run theoretical relations on macroeconomic variables (a purchasing power parity, an uncovered interest parity, a money demand, and a relation between domestic and U.S. output levels). We then impose a recursiveness assumption to identify the response of domestic variables to a monetary policy shock. The long-run restrictions embedded in the model are themselves identified, estimated, and tested using an ARDL methodology that is robust to the degree of persistence of the time series and, in particular, to whether they are trend- or first-difference stationary. With this approach, we are able to find that the response of the exchange rate to monetary policy shocks is consistent with Dornbusch's model.

Working Papers

Robust Inference with Missing Observations (with Deepa Dhume Datta and Wenxin Du). June 2023.

Abstract: The Newey-West (1987) and Andrews (1991) estimators have become the standard way to estimate a heteroskedasticity- and autocorrelation-robust (HAR) inference, but it does not immediately apply to time series with missing observations. We propose two simple modified HAR estimators for time series with missing data. First, our Amplitude Modulated estimator treats the missing observations as non-serially correlated. Second, our Equal Spacing applies to the series formed by treating the data as equally spaced. We show asymptotic consistency of both estimators and show that if missing data is ignored, usual HAR esitmators are under estimated, thus leading to under rejection. We discuss the finite sample and performance of the estimators when conducting inference using Monte Carlo simulations.

Covered Interest Parity: A Stochastic Volatility Approach to Estimate the Neutral Band. Banco de México Working Papers. No. 2020-02. 

Abstract: The neutral band is the interval where deviations from Covered Interest Parity (CIP) are not considered meaningful arbitrage opportunities. The band is determined by transaction costs and risk associated to arbitrage. Seemingly large deviations from CIP in the foreign exchange markets for the US Dollar crosses with Sterling, Euro and Mexican Peso have been the norm since the Global Financial Crisis. The topic has attracted a lot of attention in the literature. There are no estimates of the neutral band to assess whether deviations from CIP reflect actual arbitrage opportunities, however. This paper proposes an estimate of the neutral band based on the one-step-ahead density forecast obtained from a stochastic volatility model. Comparison across models is made using the log-score statistic and the probability integral transformation. The stochastic volatility models have the best fit and forecasting performance, hence superior neutral band estimates.

Unit Root Testing in ARMA Models: A Likelihood Ratio Approach. Banco de México Working Papers. No. 2016-03.

Abstract: This paper proposes a Likelihood Ratio test for a unit root (LR) with a local-to-unity autoregressive parameter embedded in ARMA(1,1) models. By dealing explicitly with dependence in a time series through the Moving Average, as opposed to the long Autorregresive lag approximation, the test shows gains in power and has good small-sample properties. The asymptotic distribution of the test is shown to be independent of the short-run parameters. The Monte Carlo experiments show that the LR test has higher power than the Augmented Dickey Fuller test for several sample sizes and true values of the Moving Average parameter. The exception is the case when this parameter is very close to -1 with a considerably small sample size.

Work in Progress

Gaussian Likelihood Tests for a Unit Root in a Near-Integrated ARMA Model (with Marcus Chambers)

The Difference-in-Variance Test for Asymmetry (with Daniel Ventosa-Santaulària A. E. Sanchez-Urbina and Eduardo Vera-Valdés)