Money, Inflation, and the Bank of Mexico

May 12th, 2012

Ernesto Sepúlveda

The question•Do you know what does the Bank of Mexico do and why is it relevant for your wellbeing?

•If not, your are in right place to learn it!

Money and the Economy

Inflation

The Bank of Mexico

Money and the Economy

• In primitive economies, barter was the only medium of exchange…

Money and the Economy

Cocoa beans

Axe money(Copper)Bullion

Roman gold coin

Chinese shell money

• Later, commodity money supported expansion of trade and division of labour

Money and the Economy

•Fiat money has no intrinsic value, yet it's the footing of any modern economy

•But it has an archfiend:Inflation

Do you know what am I talking about?

Inflation

7

¿How is it measured?By the Consumer Price Index

¿What is inflation?Continuous rise in the general price level

Inflation• Why does inflation matter?

– It inflicts huge social costs:

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Exacerbates Inequality

Distorts price signals

Generates uncertainty(interest rates)

Inflation and time…

9

Year

CP

I Ind

ex

(Ye

ar 0

=1

00)

Inflation in Mexico: 1970-2012

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Consumer Price IndexAnnual percentage change

The Bank of Mexico• It´ s the Central Bank of Mexico

• It has several ends:1) To provide the Mexican economy

with domestic currency

2) To promote the sound development of the financial system

3) To foster the smooth operation of the payment systems

But its primary objective isTo ensure the stability of the purchasing power of the Mexican currency

Autonomy

• In 1993, the Congress passed a constitutional amendment providing Bank of Mexico with autonomyi. No authority can command the central bank to

dispense financingii. Independent judgmentiii. Independent management

Monetary Policy

•“Though [paper money] has no intrinsic value, yet, by limiting its quantity, its value in exchange is as great as an equal denomination of coin, or of bullion in that coin.”

David Ricardo (1772-1823)

Bristish Economist

Final remarks

•By keeping inflation low, Bank of Mexico preserves the value of the peso•With a stable peso, the Mexican economy works much better than otherwise•A well-functioning economy favours employment, reduces poverty, and increases social welfare