Cano-Espinosa, Domicio
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Does in la ion a ge ing educe economic unce ain y?
E idence om Mexico
Economies
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MDPI – Mul idisciplina y Digi al Publishing Ins i u e, Basel
Sugges ed Ci a ion: Cano-Espinosa, Domicio (2025) : Does in la ion a ge ing educe economic
unce ain y? E idence om Mexico, Economies, ISSN 2227-7099, MDPI, Basel, Vol. 13, Iss. 4, pp.
1-16,
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Ci a ion: Cano-Espinosa, D. (2025).
Does In la ion Ta ge ing Reduce
Economic Unce ain y? E idence
om Mexico. Economies,13(4), 109.
h ps://doi.o g/10.3390/
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A icle
Does In la ion Ta ge ing Reduce Economic Unce ain y?
E idence om Mexico
Domicio Cano-Espinosa
Facul y o Economics, Uni e sidad de Panama, Panama Ci y 0819-07289, Panama; [email p o ec ed]
Abs ac : This s udy examines he dynamic ela ionship be ween in la ion, in la ion unce -
ain y, and economic pe o mance in Mexico using he Gene alized Au o eg essi e Condi-
ional He e oskedas ici y-in-Mean (GARCH-M) and bi a ia e GARCH-in-mean (BGARCH-
M) models. Based on mon hly da a om 1995 o 2019, he analysis es ima es nominal un-
ce ain y and e alua es i s mac oeconomic implica ions unde Mexico’s in la ion- a ge ing
egime. The esul s indica e a signi ican and posi i e link be ween pas in la ion and u u e
unce ain y, unde sco ing he impo ance o main aining low and s able in la ion o con ain
ola ili y. Fu he mo e, in la ion unce ain y is ound o exe a nega i e in luence on
economic pe o mance, pa icula ly in e ms o ou pu a iabili y. Howe e , he s udy does
no ind conclusi e e idence ha in la ion unce ain y declined ollowing he o mal adop-
ion o in la ion a ge ing. These indings sugges ha , while Mexico has achie ed p ice
s abili y, in la ion unce ain y emains sensi i e o ex e nal shocks and policy c edibili y.
The s udy con ibu es o he b oade li e a u e by eassessing he e ec i eness o in la ion
a ge ing in an inc easingly globalized and ola ile en i onmen , o e ing impo an lessons
o eme ging economies managing ex e nal ulne abili ies and ins i u ional cons ain s.
Keywo ds: in la ion a ge ing; in la ion unce ain y; economic pe o mance; GARCH
models; mone a y policy
1. In oduc ion
Since 1994, Mexico’s cen al bank, Banco de México (Banxico), has implemen ed an
in la ion- a ge ing (IT) amewo k as i s p ima y mone a y policy s a egy, ollowing he
abandonmen o he exchange a e as a nominal ancho . This ansi ion aligns wi h a global
end ini ia ed by economies such as New Zealand and Canada, which ha e demons a ed
imp o ed mac oeconomic pe o mance unde his egime (Mishkin & Schmid -Hebbel,
2007;S ensson,2001). The IT amewo k aims o s abilize in la ion expec a ions by pub-
licly announcing a medium- e m a ge , he eby enhancing c edibili y and mi iga ing
in la ion pe sis ence in esponse o economic shocks. This app oach is g ounded in he
New Mac oeconomic Consensus (NMC), which unde sco es he impo ance o cen al
bank accoun abili y, anspa ency, and independence in mone a y policy implemen a ion
(Wood o d,2009).
While some analyses sugges a posi i e co ela ion be ween in la ion and GDP g ow h
in Mexico, his obse ed ela ionship does no ully cap u e he ole o in la ion unce ain y
in shaping in es men and ou pu dynamics. This s udy he e o e ocuses no on in la ion
le els pe se bu on he ola ili y and p edic abili y o in la ion, which may exe nonlinea
and asymme ic e ec s on economic pe o mance, pa icula ly in eme ging ma ke s.
Al hough Mexico has achie ed ela i e p ice s abili y since he ea ly 2000s, ecen
global dis up ions, including he COVID-19 pandemic, he Russia–Uk aine con lic , and
Economies 2025,13, 109 h ps://doi.o g/10.3390/economies13040109
Economies 2025,13, 109 2 o 16
escala ing ade ensions among majo economic pa ne s such as he Uni ed S a es and
China, ha e enewed in la iona y p essu es, e en in economies wi h long-s anding in-
la ion a ge ing amewo ks. These e en s ha e exposed he limi a ions o mone a y
policy au onomy in highly in eg a ed ma ke s, whe e impo ed in la ion and supply chain
shocks ampli y domes ic p ice ola ili y. In his con ex , i becomes essen ial o e isi
he in la ion–g ow h nexus h ough he lens o in la ion unce ain y. Con e ging in la-
ion a es ac oss coun ies do no necessa ily imply symme ic mac oeconomic e ec s,
especially o eme ging economies like Mexico ha emain s uc u ally ulne able o ex-
e nal shocks and ins i u ional agili y. Thus, eassessing he esilience and c edibili y
o Mexico’s in la ion- a ge ing egime is pa icula ly ele an conside ing hese e ol ing
global dynamics.
The ela ionship be ween in la ion and economic g ow h has long been a subjec o
deba e. Ea ly heo e ical and empi ical s udies (Fishe ,1926;Phillips,1958;Tobin,1965)
sugges ed a posi i e co ela ion, a guing ha mode a e in la ion could s imula e p oduc-
ion. Howe e , he high-in la ion episodes o he 1970s and 1980s shi ed he consensus
owa d ecognizing i s de imen al e ec s, wi h esea ch highligh ing i s ad e se impac
on pu chasing powe and economic expansion (F iedman,1977;S ockman,1981). Mo e
ecen s udies sugges a nonlinea ela ionship, p oposing ha in la ion may exe neu al
o sligh ly posi i e e ec s up o a speci ic h eshold, beyond which i becomes ha m ul
(B uno & Eas e ly,1998;Eas e ly & Rebelo,1993).
This s udy ocuses on he ole o in la ion unce ain y in shaping economic pe o -
mance wi hin he con ex o a globalized and shock-p one en i onmen . Ra he han es ing
a single heo e ical hypo hesis, he analysis emphasizes he e ol ing ele ance o in la ion
unce ain y as a policy conce n, pa icula ly in eme ging economies subjec o ex e nal
ola ili y. While in la ion a ge ing has helped o s abilize expec a ions, pe sis en in la ion
ola ili y and c edibili y challenges may s ill in luence ou pu and in es men dynamics.
The e o e, his esea ch examines whe he Mexico’s in la ion- a ge ing amewo k has e ec-
i ely educed in la ion unce ain y and, consequen ly, i s impac on economic pe o mance
o e he pe iod 1995–2019.
Speci ically, he s udy add esses he ollowing esea ch ques ions:
1.
How does he ela ionship be ween in la ion and in la ion unce ain y mani es in he
Mexican economy?
2.
Wha a e he speci ic e ec s o in la ion unce ain y on Mexico’s economic pe o -
mance, pa icula ly in e ms o ou pu ola ili y?
3.
To wha ex en has Mexico’s in la ion- a ge ing amewo k been e ec i e in educing
in la ion unce ain y, and wha lessons can be d awn o o he eme ging economies?
This esea ch con ibu es o he ongoing academic discou se by p o iding empi ical
e idence om a coun y ha has unde gone signi ican in la iona y ans o ma ions. The
indings hold subs an ial policy implica ions, pa icula ly in e alua ing he e ec i eness o
in la ion a ge ing in educing mac oeconomic ola ili y and os e ing s able g ow h.
2. Li e a u e Re iew
In la ion a ge ing has been widely ad oca ed as a mone a y policy amewo k aimed
a s abilizing in la ion le els, ancho ing expec a ions, and mi iga ing unce ain y. I con-
s i u es a undamen al pilla o he New Mac oeconomic Consensus (NMC), which e-
placed ixed exchange a e egimes wi h loa ing a es, emo ed in e es a e con ols, and
signi ican ly de egula ed inancial ma ke s (Rosas Rojas,2019;Wood o d,2009). Since
i s widesp ead adop ion in he 1990s, his amewo k has been emb aced by nume ous
economies seeking o enhance he e ec i eness o mone a y policy, pa icula ly in esponse
o he limi a ions o p e ious exchange a e and mone a y a ge ing s a egies. The heo e -
Economies 2025,13, 109 3 o 16
ical ounda ion o in la ion a ge ing is deeply in e wined wi h he dynamic in e ac ion
be ween in la ion, in la ion unce ain y, and mac oeconomic pe o mance. This ela ionship
has been ex ensi ely analyzed, yielding con as ing pe spec i es on he ade-o be ween
in la ion and economic g ow h. Ea ly heo e ical con ibu ions sugges ed a posi i e co ela-
ion, whe ein mode a e in la ion was deemed conduci e o economic expansion h ough
agg ega e demand s imula ion (Fishe ,1926;Ghosh & Phillips,1998;Mundell,1963;Tobin,
1965). Howe e , empi ical e idence om he high-in la ion episodes o he 1970s and 1980s
led o a pa adigm shi , highligh ing in la ion’s ad e se e ec s, pa icula ly i s de imen al
impac on pu chasing powe , in es men e iciency, and economic ola ili y (Cooley &
Hansen,1989;F iedman,1977;S ockman,1981).
2.1. In la ion, Unce ain y, and Economic Pe o mance
A cen al conce n in mone a y economics is he ole o in la ion unce ain y in shaping
mac oeconomic dynamics. F iedman (1977) posi ed ha highe in la ion exace ba es
unce ain y, dis o ing p ice signals, hampe ing e icien esou ce alloca ion, and ul ima ely
cons aining economic g ow h. This hypo hesis has been empi ically alida ed as in la ion
ola ili y is equen ly employed as a p oxy o mac oeconomic unce ain y, demons a ing
i s nega i e impac on in es men decisions and p oduc i i y le els (Fische ,1993;Judson &
O phanides,1996). The academic discou se on in la ion’s mac oeconomic implica ions has
e ol ed om a linea o a nonlinea pe spec i e, acknowledging ha in la ion may exhibi
h eshold e ec s on economic g ow h. Sa el (1996) iden i ied a s uc u al b eakpoin in he
in la ion–g ow h nexus, es ima ing ha in la ion a es below 8% exe minimal o e en
sligh ly posi i e e ec s, whe eas in la ion su passing his h eshold subs an ially impai s
economic expansion. Subsequen empi ical analyses ha e co obo a ed hese indings,
delinea ing a ying in la ion h esholds ac oss di e en economic con ex s (Bu dekin e al.,
2004;Ghosh & Phillips,1998). The ela ionship be ween in la ion unce ain y and economic
pe o mance emains a subjec o deba e. Some schola s a gue ha heigh ened unce ain y
de e s long- e m in es men , inc eases p ecau iona y sa ings, and dampens economic
g ow h (Pindyck,1991). Con e sely, al e na i e iewpoin s sugges ha , unde ce ain
condi ions, in la ion unce ain y may encou age sa ings and capi al accumula ion, he eby
o se ing some nega i e epe cussions (Do sey & Sa e,2000). None heless, he p e ailing
consensus aligns wi h he no ion ha in la ion ola ili y unde mines economic e iciency,
exace ba es isks associa ed wi h long- e m economic planning, and dis o s in es men
incen i es (Ball,1990;Holland,1993).
Since he ea ly 2000s, GARCH models ha e been widely used o examine he dynamic
ela ionship be ween in la ion unce ain y and mac oeconomic pe o mance, pa icula ly
in bo h eme ging and ad anced economies. K. B. G ie and Pe y (2000) and K. B. G ie
e al. (2004), applying VARMA-BGARCH and BEKK speci ica ions o US da a, ound ha
in la ion unce ain y exe s a s onge in luence on in la ion han ou pu unce ain y does
on g ow h, and ha o e all unce ain y ends o be nega i ely associa ed wi h mac oe-
conomic pe o mance. Fo B azil, Vale (2005) epo ed a nega i e ela ionship be ween
in la ion unce ain y and ou pu g ow h. In he case o Mexico, R. G ie and G ie (2006)
and Pe o ini He nández and Rod íguez Bena ides (2012) p esen ed consis en indings:
in la ion unce ain y dampens economic g ow h, e en when a e age in la ion may ex-
hibi a sho - e m posi i e e ec on ou pu . Collec i ely, hese s udies highligh he em-
pi ical alidi y and e sa ili y o GARCH models in cap u ing ola ili y spillo e s and
assessing he b oade mac oeconomic implica ions o in la ion unce ain y. Recen empi -
ical con ibu ions ad ance his deba e by iden i ying nonlinea and h eshold dynamics.
Mohammad Sadeghi e al. (2023)
ound ha , in he Middle Eas , in la ion exe s no signi i-
can e ec on g ow h below a 10.1% h eshold bu becomes ha m ul beyond i . Chowdhu y
Economies 2025,13, 109 4 o 16
(2024) used bi a ia e nonlinea GARCH-in-mean models o show ha nominal unce ain y
supp esses ou pu du ing down u ns, while eal unce ain y yields egime-dependen
e ec s. These indings suppo he need o adap i e mone a y amewo ks ailo ed o
speci ic mac oeconomic en i onmen s. E egha and Ndo icimpa (2022), examining Nige ia,
alida ed he F iedman and Cukie man–Mel ze hypo heses, showing ha in la ion unce -
ain y ampli ies in la ion and dep esses g ow h, especially when compounded by ex e nal
shocks like oil p ice ola ili y.
2.2. The Role o Cen al Banks in Managing In la ion Unce ain y
The capaci y o cen al banks o mi iga e in la ion unce ain y is pa amoun o he
e ec i eness o in la ion- a ge ing egimes. Empi ical esea ch unde sco es he c i ical ole
o cen al bank anspa ency and c edibili y in ancho ing in la ion expec a ions and cu bing
mac oeconomic ola ili y (Cukie man & Mel ze ,1986;O phanides & Williams,2004).
Ne e heless, in la ion- a ge ing amewo ks a e no immune o unce ain y. Ex e nal
shocks, policy misalignmen s, and in o ma ional asymme ies be ween policymake s and
economic agen s pe pe ua e unce ain y ega ding u u e in la ion ajec o ies (De e eux,
1989). Despi e hese challenges, in la ion a ge ing has been associa ed wi h enhanced
mone a y s abili y in economies ha ha e success ully ins i u ionalized i (Ball & She idan,
2003;Mishkin & Schmid -Hebbel,2007). Howe e , conce ns pe sis ega ding i s long- e m
e icacy in mi iga ing in la ion unce ain y, pa icula ly in he con ex o global economic
luc ua ions and e ol ing mac o- inancial condi ions.
G owing e idence in he mone a y policy li e a u e unde sco es ha he e ec i eness
o in la ion- a ge ing egimes in mi iga ing in la ion unce ain y hinges c i ically on he
c edibili y o cen al banks. Bicchal (2022) p o ided compelling c oss-na ional e idence
showing ha ime- a ying c edibili y indica o s, bo h backwa d- and o wa d-looking, a e
s ongly associa ed wi h educ ions in mac oeconomic ola ili y. In pa icula , o wa d-
looking c edibili y con ibu es o ancho ing expec a ions and s abilizing bo h in e es
a e and in la ion dynamics. Complemen ing his, Dubey and Mish a (2023) iden i ied
an “an icipa ion e ec ”, whe eby cen al banks s a egically enginee disin la ion be o e
o mally adop ing in la ion a ge ing, he eby secu ing ea ly c edibili y and locking in
in la iona y expec a ions. These indings e eal ha i is no me ely he adop ion o an
IT amewo k bu he s a egic communica ion and expec a ion managemen by cen al
banks ha d i e c edibili y gains. A si´c e al. (2022) u he highligh ed ha , e en unde
ins i u ional agili y and high dolla iza ion, eme ging-ma ke cen al banks can build
c edibili y o e ime h ough pe sis en applica ion o in la ion- ocused egimes, ul ima ely
os e ing mac oeconomic s abili y.
Eme ging empi ical e idence also challenges he assump ion o uni o m ou comes
unde in la ion- a ge ing amewo ks. Ha mann e al. (2022), using an Unobse ed Com-
ponen s S ochas ic Vola ili y (UCSV) model, showed ha sho - e m in la ion unce ain y
inc eases when in la ion di e ges om a ge le els, e en in coun ies ha o mally adop
in la ion a ge ing, emphasizing he impo ance o policy consis ency and c edibili y. In
he case o Sou h A ica, Mandeya and Ho (2021) ound ha , ollowing he adop ion o
in la ion a ge ing, in la ion unce ain y ceased o signi ican ly a ec g ow h, poin ing o
po en ial s abilizing e ec s when he egime is e ec i ely ins i u ionalized. Nene e al.
(2022), h ough a compa a i e egional app oach, epo ed ha some Eu opean IT coun ies
display supe io ou comes in e ms o unce ain y educ ion and g ow h suppo ela i e
o hei A ican coun e pa s, la gely due o di e ences in ins i u ional capaci y and cen al
bank c edibili y. Simila ly, A omí e al. (2022) unde sco ed he pe sis en mac oeconomic
ola ili y in La in Ame ica as a majo impedimen o in es men and economic de elop-
Economies 2025,13, 109 5 o 16
men , unde sco ing he s uc u al hu dles ha in la ion- a ge ing egimes mus o e come
o be success ul.
2.3. Resea ch Gap and Con ibu ion
While ex ensi e esea ch has examined he in la ion–g ow h nexus and he mac oeco-
nomic ami ica ions o in la ion unce ain y, ew s udies ha e empi ically assessed how
in la ion unce ain y e ol es unde in la ion- a ge ing amewo ks in eme ging economies,
pa icula ly in he ace o inc easing global ola ili y. The exis ing li e a u e o en ocuses
ei he on alida ing classical heo ies o analyzing in la ion le els in isola ion wi hou
ully conside ing how pe sis en nominal ola ili y in e ac s wi h s uc u al ulne abili ies,
policy c edibili y, and ex e nal shocks.
This s udy add esses his gap by e alua ing he long- e m pe o mance o Mexico’s
in la ion- a ge ing egime om 1995 o 2019, using ad anced ola ili y models (GARCH-M
and VAR-BGARCH-M) o es ima e he impac o in la ion unce ain y on mac oeconomic
pe o mance. Unlike p e ious s udies ha ocus on con i ming heo e ical expec a ions,
his esea ch emphasizes he con ex ual ele ance o in la ion unce ain y. I con ibu es by
assessing whe he in la ion- a ge ing amewo ks emain obus and c edible, p o iding
new empi ical e idence om a s uc u ally open and ex e nally sensi i e economy.
The o iginali y o his s udy lies in i s combined ocus on mac oeconomic ola ili y and
c edibili y, o e ing nuanced insigh s in o he e ec i eness o in la ion a ge ing beyond
i s con en ional me ics. The indings ca y policy ele ance o eme ging economies
ha seek o na iga e in la ion con ol while enhancing economic s abili y in a u bulen
global en i onmen .
3. Ma e ials and Me hods
3.1. Da a and Va iables
This s udy u ilizes high- equency mon hly da a spanning he pe iod om 1995 o
2019 o igo ously analyze he ela ionship be ween in la ion, in la ion unce ain y, and
economic pe o mance in Mexico. In la ion is ope a ionally de ined as he annualized
mon hly loga i hmic di e ence in he Consume P ice Index (CPI), while economic ac i i y
is p oxied by he Indus ial P oduc ion Index (IPI). These indica o s a e commonly used
in he empi ical li e a u e o assess sho - and medium- e m mac oeconomic luc ua ions.
The choice o high- equency da a enables a de ailed examina ion o ola ili y dynamics
and ansmission e ec s ac oss mac oeconomic a iables (R. M. G ie & G ie ,1998;Pe -
o ini He nández & Rod íguez Bena ides,2012). To ensu e me hodological obus ness
and s a is ical alidi y, a ious econome ic echniques a e implemen ed o model in la ion
and i s unce ain y. Speci ically, Gene alized Au o eg essi e Condi ional He e oskedas ic-
i y (GARCH) models and Vec o Au o eg essi e (VAR) amewo ks, in conjunc ion wi h
mul i a ia e GARCH s uc u es, a e es ima ed o cap u e he in ica e in e play be ween
in la ion dynamics, unce ain y p opaga ion, and mac oeconomic ola ili y.
3.2. Empi ical S a egy
To cap u e he ime- a ying na u e o in la ion and i s associa ed unce ain y, we apply
an ARMA-GARCH-in-mean (ARMA-GARCH-M) model. This model s uc u e allows
o he simul aneous es ima ion o in la ion ola ili y and i s eedback in o in la iona y
dynamics, o e ing insigh s in o how pe cei ed unce ain y may shape in la ion beha io
o e ime, in acco dance wi h he me hodology de eloped by Engle e al. (1987) and
subsequen ly applied o in la ion dynamics by R. M. G ie and G ie (1998). The inclusion
o a s uc u al b eak a iable e lec s he adop ion o he in la ion- a ge ing amewo k,
enabling a compa ison o in la ion unce ain y dynamics be o e and a e he egime shi .
Economies 2025,13, 109 6 o 16
Fu he mo e, o e alua e he in e ac ion be ween in la ion, unce ain y, and eal eco-
nomic pe o mance, we employ a bi a ia e VAR-GARCH-in-mean (VAR-BGARCH-M)
amewo k. This model in eg a es he empo al in e dependence o in la ion and ou pu
wi h hei espec i e ola ili y p ocesses, enabling an assessmen o how unce ain y in
in la ion p opaga es h ough he economy. A mul i a ia e BEKK pa ame e iza ion is used
o cap u e he condi ional a iance–co a iance s uc u e, which acili a es he iden i ica ion
o ola ili y spillo e s and pe sis ence e ec s.
3.3. Model S uc u e and In e p e a ion
While his s udy acknowledges he exis ence o po en ial nonlinea i ies in he ela ion-
ship be ween in la ion, unce ain y, and economic g ow h, as sugges ed by he h eshold
and egime-swi ching li e a u e, i op s o a GARCH-M and VAR-BGARCH-M modeling
app oach o he ollowing easons. Fi s , hese models a e pa icula ly well sui ed o
cap u ing ime- a ying ola ili y, ola ili y clus e ing, and eedback e ec s, all o which a e
empi ically obse ed in mac oeconomic ime se ies. Second, inco po a ing condi ional a i-
ances in o he mean equa ions acili a es he es ima ion o he di ec impac o unce ain y
on mac oeconomic ou comes while a oiding he need o impose h esholds o ely on
p e-speci ied egime s uc u es, as is some imes necessa y in h eshold o egime classi ica-
ions. Thi d, he BEKK-GARCH speci ica ion adop ed in he mul i a ia e con ex p o ides
a lexible amewo k o modeling dynamic in e dependencies and ola ili y spillo e s
be ween in la ion and ou pu , which a e essen ial o unde s anding he ansmission mech-
anisms in eme ging economies. We acknowledge ha h eshold-based o egime-swi ching
models could o e addi ional insigh s, bu he chosen amewo k s ikes a balance be ween
in e p e abili y, obus ness, and da a equi emen s and is well es ablished in he li e a u e
o analyzing in la ion unce ain y.
The uni a ia e ARMA-GARCH-M model used o es ima e in la ion unce ain y and
i s eedback e ec on in la ion is speci ied as ollows:
The o mal speci ica ion o he model is gi en by
π =β0+
p
∑
i=1
βiπ −i+
q
∑
j=1
θjε −j+γ1ph +ε (1)
h =α0+α1ε2
−1+α2h −1+α3π −1+αd
4d (2)
whe e
•π ep esen s he in la ion a e a ime .
•h
deno es he condi ional a iance o in la ion, se ing as a p oxy o in la ion unce ain y.
•γ1quan i ies he impac o in la ion unce ain y (√h ) on in la ion dynamics.
•ε is an e o e m cha ac e ized by ze o mean and condi ional a iance h .
•α1and α2cap u e he pe sis ence cha ac e is ics o in la ion unce ain y.
•α3e alua es he e ec o lagged in la ion on i s unce ain y.
•αd
4
measu es he s uc u al shi in in la ion unce ain y ollowing he implemen a ion
o an in la ion- a ge ing egime.
The bi a ia e VAR-BEKK-GARCH-M model is o mula ed o assess he join dynamics
be ween in la ion and ou pu , inco po a ing hei espec i e condi ional a iances in o he
mean equa ions.
The VAR model is o mally exp essed as ollows:
BY =C+
p
∑
i=1
ΓiY −i+ε (3)
Economies 2025,13, 109 7 o 16
whe e
•Y is a ec o comp ising in la ion (π ) and economic g ow h (y ).
•B ep esen s a ma ix o s uc u al coe icien s.
•Cdeno es a ec o o cons an e ms.
•Γi
ep esen s coe icien ma ices ha encapsula e he dynamic in e ac ions be ween
in la ion and economic g ow h.
•ε
is a ec o o s ochas ic e o e ms wi h ze o mean and a condi ional a iance–
co a iance ma ix H .
The op imal lag leng h
p
o he VAR sys em is de e mined by minimizing he Akaike
In o ma ion C i e ion (AIC) and he Schwa z Bayesian In o ma ion C i e ion (BIC).
To igo ously model he ola ili y dynamics o in la ion and economic g ow h, a mul-
i a ia e GARCH model in i s BEKK pa ame e iza ion (Engle & K one ,1995) is employed.
This speci ica ion allows o an asymme ic and lexible ep esen a ion o condi ional a i-
ances and co a iances, enabling he iden i ica ion o spillo e e ec s be ween in la ion and
economic ac i i y.
The BEKK ep esen a ion is gi en by
H =C∗
0C∗′
0+A∗
1ε −1ε′ −1A∗′
1+B∗
1H −1B∗′
1(4)
whe e
•H
deno es he condi ional a iance–co a iance ma ix o in la ion and economic
g ow h.
•C∗
0
is a lowe iangula ma ix o cons an pa ame e s, ensu ing posi i e de ini eness.
•A∗
1
and
B∗
1
a e coe icien ma ices cap u ing he ansmission o pas shocks and
pe sis ence in ola ili y, espec i ely.
The coe icien s wi hin
A∗
1
quan i y he impac o p e ious inno a ions on he cu en
condi ional a iance, while hose in
B∗
1
e lec he deg ee o pe sis ence in ola ili y dy-
namics. This o mula ion allows o he empi ical assessmen o c oss-ma ke ola ili y
spillo e s be ween in la ion and economic g ow h.
3.4. Impac o In la ion Unce ain y on Economic G ow h
To assess whe he in la ion unce ain y signi ican ly in luences economic pe o mance,
he condi ional a iance o in la ion
phπ,
is explici ly inco po a ed in o he mean equa ion
o he VAR model:
Y =µ+
p
∑
i=1
ΓiY −i+Ψph +ε (5)
whe e
•µis a ec o o cons an e ms.
•Ψ ep esen s a coe icien ma ix cap u ing he e ec o in la ion unce ain y on in la-
ion and economic g ow h.
•√h
is he ec o o condi ional s anda d de ia ions associa ed wi h in la ion and
economic g ow h.
The comple e sys em can be s uc u ed as ollows:
Y ="y
π #,ε ="εy,
επ, #,ph ="phy,
phπ, #(6)
Economies 2025,13, 109 8 o 16
µ="µy
µπ#,Γi="Γ(i)
11 Γ(i)
12
Γ(i)
21 Γ(i)
22 #,Ψ="ψ11 ψ12
ψ21 ψ22#(7)
These model speci ica ions p o ide a lexible s uc u e o cap u ing ola ili y clus-
e ing, eedback e ec s, and spillo e s in a high- equency mac oeconomic se ing. The
modeling amewo k is designed no only o es ima e s a is ical ela ionships bu o p o-
ide a s uc u ed lens h ough which mac oeconomic unce ain y can be analyzed in an
eme ging-ma ke con ex . By inco po a ing condi ional a iances di ec ly in o he mean
equa ions, we a e able o quan i y he in luence o in la ion unce ain y on mac oeco-
nomic pe o mance o e ime. The use o high- equency ola ili y models is especially
pe inen in en i onmen s cha ac e ized by policy shi s, global inancial u bulence, and
in la iona y shocks.
This app oach enables us o e alua e how e ec i e Mexico’s in la ion- a ge ing egime
has been in p omo ing p ice s abili y and mi iga ing he ad e se e ec s o unce ain y on
eal economic a iables. The goal is o gene a e empi ical e idence ha in o ms policy
discussions and enhances ou unde s anding o he ansmission mechanisms linking
mone a y egimes o economic esilience.
3.5. Model Diagnos ics and Robus ness
To ensu e he alidi y and obus ness o he es ima ed model, he ollowing diagnos ic
es s a e conduc ed:
• Residual Au oco ela ion: Ljung–Box es and B eusch–God ey es .
•
He e oskedas ici y: Engle’s (1982) ARCH es o de ec condi ional he e oskedas ici y
in esiduals.
•
S a iona i y o Se ies: Augmen ed Dickey–Fulle (ADF) and KPSS es s o assess uni
oo p ope ies.
•
Model Fi E alua ion: Compa ison o Akaike In o ma ion C i e ion (AIC) and Schwa z
Bayesian In o ma ion C i e ion (BIC) o op imal lag selec ion.
I is impo an o acknowledge ce ain me hodological limi a ions inhe en in he use
o GARCH- ype models. While he adop ed amewo k is e ec i e o modeling ola ili y
dynamics and cap u ing eedback e ec s o e ime, i does no explici ly add ess po en ial
endogenei y conce ns. While he model does no ully add ess endogenei y conce ns,
including e e se causali y and omi ed a iable bias om ex e nal shocks, hese issues
a e acknowledged as po en ial limi a ions and sugges di ec ions o u u e esea ch. Ou
aim, howe e , is no o iden i y s uc u al causali y bu o p o ide a dynamic desc ip ion o
ola ili y in e ac ions and hei mac oeconomic implica ions in a highly open and shock-
p one eme ging economy. The use o high- equency da a and lag s uc u es helps o
mi iga e, al hough no elimina e, some endogenei y isks.
4. Resul s and Discussion
Figu e 1illus a es ha , ollowing he adop ion o a lexible exchange a e egime in
1995 and he implemen a ion o in la ion a ge ing—measu ed as he annualized mon hly
di e ence in he loga i hm o he Consume P ice Index (CPI), de ined as
π=logINPC
INPC −1×1200 (8)
his a iable exhibi s a downwa d end and g ea e s abili y, pa icula ly a e 2003. Con-
e sely, he economic ou pu a iable, measu ed as he annualized mon hly di e ence in
he loga i hm o he Indus ial P oduc ion Index (IPI), de ined as
Economies 2025,13, 109 15 o 16
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