Economics Mexico How Interest Rates Can Be Term Paper

Download this Term Paper in word format (.doc)

Note: Sample below may appear distorted but all corresponding word document files contain proper formatting

Excerpt from Term Paper:


Mexico; How Interest Rates Can Be Used to Manage an Economy

The management of the economy, undertaken with strategies from the government and decision fro the central bank, is usually undertaken with the aim of promoting and supporting a stable economy, balancing the desire for sustainable growth with the need to constrain inflation. This is an issue faced by almost all countries; inflation can be harmful to an economy, impacting not only in the internal stakeholders, but influencing the exchange rate. The control of inflation, often through the use of interest rates, may also help to stifle growth. This can be a conundrum, as stimulating growth and constraining inflation requires a very careful balance of economic policies. Mexico has been faced with this issue and in March 2013 the Banco de Mexico

made a surprise decision to reduce their interest rates from 4.5% to 4% (Trading Economics, 2013), and then hold the rate at 4% in April (Hughes and O'Boyle, 2013). Management of the economy is a tricky balancing act, and when the country had a growth rate substantially above that of many western countries in the post global recession period, one may wonder why there was a reduction in interest rates. Looking at the situation of Mexico and the use of interest rates it is possible to examine the reasons for the decision and how the rate reduction may be good for Mexico's economy in the long-term.

Mexico has performed relativity well over the last few years; the economy has been showing positive growth well above rates in the more developed countries. In 2012 it was estimated that the real rate of growth in the GDP was 4%, in 2011 it was 3.9% and in 2010 it was 5.6% (CIA, 2013). Three years of growth has been beneficial to the country. With an official GDP of $1.163 trillion in 2012, which equated to a per capita rate of $15,300 in purchasing parity terms (CIA, 2013), it is also apparent there is likely to be more room for growth in the economy.

The results would appear to indicate that there is not an issue with growth in the economy. The strength of the economy explains why the interest rates in Mexico have been higher than nations such as the U.S., the UK and Japan. For example, the Federal Reserve in the U.S. set a rate of 0.25% in December of 2008 which remains in place to the current day (Trading Economics, 2013). The UK had had an interest rate of 0.5% since March 2009 and Japan has an interest rate of 0% (Trading Economics, 2013). The difference in the performance of the Mexican economy and these three developed nations can be seen in their respective GDP growth rates. While Mexico saw their GDP grow by 4% in 2012, in the U.S. there was only growth of 1.9% for the year, with some quarters being particularly low; for example the third quarter of 2012 only saw growth of 0.4% compared to the same period in the previous year. The story was similar in the UK, with the real growth for the year 2012 estimated at -0.1% (Index Mundi, 2013), and in Japan the GDP real growth rate it was 2.2%, with the previous year having real growth rate of -0.8% (Index Mundi, 2013). In all three cases the lower interest rates are present where there is a desire to stimulate growth in the economy. It is notable that in all of these economies inflation rates have also remained low.

The main idea is that lowering interest rates will stimulate the economy as a result of the increase the level of disposable income that is available. When interest rates are low households and companies with debt will spend less on servicing that debt. With less money spent to service debt, the level of disposable income that can be spent on other items or services increases. If people and companies have more money they have two main options to spend it or save it. When interest rates are low there are limited benefits associated with saving, as the return on money is low. Additionally, when interest rates are low and the cost of debt is low, further stimulation is created by facilitating lending; companies and individuals are more likely to borrow money when it costs them less, which will increase their utility. The borrowing of money by households or companies will therefore help to stimulate demand further, as well as aiding the credit creation cycle.

In March 2013 Mexico lowered their interest rate to 4%, from the previous level of 4.5% (Hughes and O'Boyle, 2013). This lowering of the interest rate was the first reduction in four years (Hughes and O'Boyle, 2013). The decision was a surprise to the markets, a surprise which can be explained when considering the relatively healthy level of growth seen in the Mexican economy. Understanding the reason for the higher interest rate can be partly supported by looking at the rate of growth in real GDP. However, unlike the U.S., the UK in Japan, Mexico has also been dealing with a problem of inflation. While it is generally recognized that for economic growth to take place there needs to be a moderate level of inflation in any economy, where it is too great it can have negative effects (Howells and Bain, 2007). It is generally believed that a rate of between 1.5% and 2.5% is sufficient to provide for sustainable growth without the negative impacts (Nellis and Parker, 2000). In Mexico the inflation rate has been much higher, as shown in figure 1 below.

Figure 1; Inflation rate in Mexico 2008 -2013

(Trading Economics, 2013)

During the entire period the inflation rate is not drop below 3%. The higher interest rates seen over the last few years can be considered in the context of the inflation. If lowering interest rates to stimulates demand, increasing them, or holding them higher may help to stifle or slow down demand. Inflation occurs when there is too much money chasing too few goods, by reducing the amount of money, or in this case disposable income, the pressures for inflation reduced (Nellis and Parker, 2000). Therefore, in line with Mexico's stated policy, the level of interest rates appear to have been implemented to reduce the rate of inflation, a strategy which according to the graph above appears to have had some limited success, with interest rates being held to avoid stifling growth.

The balance between supporting growth and constraining inflation can be argued as the motivation behind the decision to reduce interest rates in March 2013. Many commentators who had been watching Mexican interest rates had expected the rate to be decreased, but the decrease was forecast for later in the year. It appears that there are two potential factors that have motivated the central bank to decrease the interest rates. In 2012 the inflation rate was 3.1%, the target rate for the central bank was 3%, and therefore the inflationary pressures within the economy were subsiding giving the bank a little bit more flexibility (Thompson, 2013). However, a significant factor has been the noted slow down in several sectors of the economy, particularly manufacturing and textiles (Thompson, 2013). It is known that when monetary policies are used to make adjustments to an economy there will be a lag and that the process is inexact (Nellis and Parker, 2000). If there is a current slow down, and forecasts indicate that slow down will continue, delaying taking action to stimulate the economy may increased the impact on the slow down on the overall economy. Mexico adopted a proactive strategy, reducing the interest rates now to help alleviate a problem that was emerging and protect the economic growth.

In summary, Mexico had higher interest…[continue]

Cite This Term Paper:

"Economics Mexico How Interest Rates Can Be" (2013, May 01) Retrieved December 10, 2016, from

"Economics Mexico How Interest Rates Can Be" 01 May 2013. Web.10 December. 2016. <>

"Economics Mexico How Interest Rates Can Be", 01 May 2013, Accessed.10 December. 2016,

Other Documents Pertaining To This Topic

  • Economic Situation Looking at the Economy From

    Economic Situation Looking at the economy from a macroeconomic viewpoint means looking at a more broad approach to individual economic factors, weighing those factors, and making a determination as to whether the economy is stable and improving for the populace. Sustainable growth is one of the goals of economic development, and while there are peaks and valleys, the overall level and growth filters down to many factors. A booming economy, for

  • Economics US Economy 2009 Economy Had to

    Economics US Economy 2009 economy had had to adapt and change over the years. The country has moved from a nation where there were significant differences between the economic conditions as well as different policies which impact on the economic conditions of the states. A general trend over the last 200 years has been a movement away from manufacturing and towards white collar jobs, including high tech industries and the knowledge industries

  • Economics Politics Trade Geopolitical Base

    For the period of the late 1960s and early 1970s, West Germany strived to assist the dollar. The United States and many other nations pushed West Germany to reassess so as to make up for the dollar excess. (Germany in the World Economy) At last, after escalating waves of conjectures, the Bretton Woods system had a collapse in August 1971. All through the post-Bretton Woods period, the deutsche mark stayed

  • Economic Growth of Japan Cross

    This "crippled operations" not only in local businesses but in companies located in the most affected regions that supplied materials for manufacturing. In other words, Japan suffered from a shutdown of many companies that provided certain parts for cars and electronics. For example, the area that was slammed by the tsunami was a "supplier hub" where companies like Hitachi produced special parts -- including a "…$2 sensor that is

  • Economics Finance MBA Level

    Disrupting America's economic system is a fundamental objective of terrorists Even as the world continues to struggle with the terrible shock from the September 11 attacks in New York and Washington, one principle lesson has already become clear: disrupting our economic system is a fundamental objective of terrorists. Prior to September 11, our economic environment was certainly not immune to terror, in comparison to many other nations; we lived relatively terror-free. Now,

  • Examine the Economic Geographies of Contemporary Latin America Using...

    Economic Geographies of Contemporary Brazil Economic geographies of contemporary Latin America (Brazil), using globalization theories Economic geography is defined as the branch of Geography that is concerned with the interrelations between the economic and the physical conditions to the production and distribution of the available commodities or resources (Merrriam Webster Incorporated, 2011). It deals with the influence of both the organic and inorganic environment on the activities of man. This paper is focused

  • Economic Impact of Katrina Impact

    This is a pattern that is relatively consistent over a long time period (Clayton & Spletzer, 2006). The only difference in 2005 was that unemployment claims did not rise in the fourth quarter with the drop in jobs, as they had done in the past. It is difficult to draw definitive conclusions as to where these employees went in the fourth quarter of 2005. To do so would be filled

Read Full Term Paper
Copyright 2016 . All Rights Reserved