% annual growth rate:
Sources: M3 from Banco de Mexico and nominal GDP from IMF database, as at May 2019.
The medium-term relationship between money and nominal GDP growth in Mexico, 1983-2018
Five-year moving averages of annual % changes, with 1981 being the start of the first five-year period
Comment on monetary trends in Mexico
Mexico’s recent monetary history shows the importance of fiscal and monetary discipline to macroeconomic stability. Recurrent fiscal deficits in the 1970s and 1980s, financed by an accommodating monetary policy (effectively, the monetarisation of the deficit) resulted in an unsustainable rate of growth of broad money (nearly 72% on average in the 1980s) and consequently very high inflation and output instability. As a result of the excess in money growth and lack in fiscal discipline, the government defaulted on its debt in 1982 and the currency (peso) could not keep its fixed parity against the US dollar and was devalued by nearly 50% in 1976 as well as on other different occasions in the 1980s. It has floated since the crisis of 1976.
Greater monetary and fiscal orthodoxy was introduced in the 1990s, with the national central bank being granted independence in 1994. This essentially meant that monetisation of the government deficit by the central bank was banned. With the exception of a banking and balance of payment crisis in 1995, which resulted in the devaluation of the peso, monetary growth has been far more moderate and stable since the mid-1990s onwards and so has inflation. The central bank introduced inflation targets in 1996 and has maintained low and stable inflation through to 2016, although there was a spike up to almost 7% in 2017.