Inflation and Exchange Rate Regimes in Mexico

<jats:p>The paper presents a version of the exchange‐rate‐regime model of inflation. Quarterly data from Mexico from 1946 to 1995 are used to estimate and test a simultaneous‐equation model for wage inflation, price inflation and industrial production, taking account of the Lucas critique and the statistical properties of the data. The main finding is that, after the fall of the fixed‐exchange‐rate regime in 1976, there was a Barro–Gordon type inflation bias owing to the inability of policymakers to commit to low inflation. There is no significant evidence of political business cycles in inflation.</jats:p>