Inflation and Exchange Rate Regimes in Mexico

We present a version of the exchange-rate regime model of inflation. We then use quarterly data from Mexico during 1946Q1-1995Q1 to test and estimate a simultaneous equation model for wage inflation, price inflation and industrial production. In doing so, we respect the Lucas critique and take into account the statistical properties of the data. The main empirical finding is that after the fall of the fixed exchange-rate regime in 1976, there is a Barro-Gordon type inflation bias due to the inability of policy-makers to commit to low inflation. There is no significant evidence of political business cycles in inflation