1. Money, Inflation, and the Bank of Mexico
May 12th, 2012
Ernesto Sepúlveda

2. The question
•Do you know what does the Bank of Mexico do and
why is it relevant for your wellbeing?
•If not, your are in right place to learn it!

3. Money and the Economy
Inflation
The Bank of Mexico

4. Money and the Economy
• In primitive economies, barter was the only
medium of exchange…

5. Money and the Economy
Cocoa beans
Axe money
(Copper)Bullion
Roman gold
coin
Chinese shell
money
• Later, commodity money supported
expansion of trade and division of labour

6. Money and the Economy
•Fiat money has no
intrinsic value, yet it's
the footing of any
modern economy
•But it has an archfiend:
Inflation
Do you know what am I
talking about?

7. Inflation
7
¿How is it measured?
By the Consumer Price Index
¿What is inflation?
Continuous rise in the general
price level

8. Inflation
• Why does inflation matter?
– It inflicts huge social costs:
8
Exacerbates Inequality
Distorts price signals
Generates uncertainty
(interest rates)

9. Inflation and time…
9
Year
CPIIndex(Year0=100)

10. Inflation in Mexico: 1970-2012
10
Consumer Price Index
Annual percentage change

11. The Bank of Mexico
• It´ s the Central Bank of Mexico
• It has several ends:
1) To provide the Mexican economy
with domestic currency
2) To promote the sound development
of the financial system
3) To foster the smooth operation of
the payment systems
But its primary objective is
To ensure the stability of the purchasing power of
the Mexican currency

12. Autonomy
• In 1993, the Congress passed a
constitutional amendment providing Bank
of Mexico with autonomy
i. No authority can command the central bank to
dispense financing
ii. Independent judgment
iii. Independent management

13. Monetary Policy
•“Though [paper money] has
no intrinsic value, yet, by
limiting its quantity, its value in
exchange is as great as an
equal denomination of coin, or
of bullion in that coin.”
David Ricardo (1772-
1823)
Bristish Economist

14. Final remarks
• By keeping inflation low, Bank of Mexico preserves
the value of the peso
• With a stable peso, the Mexican economy works
much better than otherwise
• A well-functioning economy favours employment,
reduces poverty, and increases social welfare