A Century of Monetary Shifts: How Banco de México Adapted to Global and Domestic Challenges

As Banco de México commemorates its 100th anniversary, the institution’s journey through a wide range of monetary and exchange rate regimes provides a rich perspective on Mexico’s economic evolution and the central bank’s pursuit of stability.

Initially, Banco de México operated under the gold standard, mirroring many global economies of the early 20th century. However, this system proved too rigid in the face of economic shocks such as the Great Depression, prompting a shift to a system of fiat money anchored by a predetermined exchange rate. Through much of the mid-20th century, Mexico maintained this stability with fixed or controlled exchange rate regimes, which were effective during periods of fiscal discipline and moderate inflation, particularly from the 1950s to early 1970s.

The abandonment of the Bretton Woods system in the 1970s and subsequent external shocks led to rising global inflation, and eventually, an unsustainable currency peg. The 1980s marked a period of economic volatility, balance of payments crises, and the experimentation with crawling pegs and exchange rate bands designed to address mounting external imbalances and inflationary pressures.

A decisive turning point arrived in the mid-1990s after another severe financial crisis that exhausted Banco de México’s reserves. The outcome was a reluctant, yet now enduring, transition to a free-floating exchange rate regime and the later institutionalization of an inflation targeting framework. Enhanced central bank autonomy and transparent communication set the groundwork for credibility and policy effectiveness.

This flexible framework has enabled Mexico’s monetary policy to absorb external and internal shocks more effectively. Notably, exchange rate adjustments have cushioned the impact of commodity price drops or shifts in global trade, as seen in the 2014–2016 period during falling oil prices and heightened global uncertainty. Additionally, the floating regime has allowed Banco de México to set its own interest rate path based on domestic considerations, rather than tracking the U.S. Federal Reserve, though global financial cycles and the interconnectedness with the U.S. economy continue to play a significant role in outcomes.

While evidence shows that changes in the policy rate affect other interest rates in Mexico—particularly in the short term—the transmission is less pronounced for longer-term rates and overall credit compared to other countries, due in part to the relatively low level of financial penetration. Nevertheless, the flexible exchange rate remains pivotal in transmitting monetary policy to the broader economy, especially in influencing the prices of tradable goods.

In summary, Banco de México’s evolution from rigid currency pegs to a flexible monetary regime highlights the importance of adaptability in the face of structural and external shocks. This century-long experience underscores how independent, credible monetary policy, paired with a floating exchange rate, supports economic resilience and price stability in a world of constant change.