A Vector Autoregression Model to Analyze Inflation in Mexico from 1970 to 1987

Abstract

A Vector Autoregressive Model of the Mexican economy was employed to empirically find the transmission channels of price formation. The structural changes affecting the behavior of the inflation rate during 1970-1987, motivated the analysis of the changing influences of the explanatory variables within three different subperiods, namely: 1970-1976, 1978-1982 and 1983-1987. A main finding is that, among the variables considered, the public prices were the most important in explaining the variability of the inflation, irrespective of the subperiod under study. Another finding is that inflationary inertia played a different role in each subperiod.