ABSTRACT
Mexico's ability to produce goods efficiently and its ability to attract foreign exchange based on its long-term growth prospects limit the impact of monetary policy, in isolation from other economic policies. The Mexican government ability to use monetary policy to limit the rate of inflation is constrained by the ability of Mexican and foreign savers and investors to switch from pesos to dollars and other foreign currencies. The supply of foreign exchange came from the surplus on foreign trade, foreign direct investment (FDI) and investment in financial securities, receipts from the sale of public and private bonds, and remittances from Mexicans who work abroad. North American Free Trade Agreement (NAFTA) opened up the Mexican banking system to greater foreign participation, although initially domestic capital's majority ownership of commercial banks remained intact. The Central Bank authorized dollar deposits in the local market, with a high-required reserve on deposit, to prevent an outflow of capital and to continue the fixed-exchange-rate policy.
