Monetary Policy, Regime Shifts, and Inflation Uncertainty in Peru (1949-2006)

Paul Castillo, Alberto Humala and Vicente Tuesta

No 2007-005, Working Papers from Banco Central de Reserva del Perú

Abstract: This paper evaluates the link between inflation and inflation uncertainty in a context of monetary policy regime shifts for the Peruvian economy. We use a model of unobserved components subject to regime shifts to evaluate this link. We verify that periods of high(low) inflation me an were accompanied by periods of high(low) both short -and long- run uncertainty in inflation. Interestingly, unlike developed countries, short run uncertainty is important. These relationaships are consistent with the presence of three clearly differentiated regimes. First, a period of price stability, then a high -inflation high-volatility regime, and finally a hyperinflation period. We also verify that during a recent period of price stability, both permanent and transitory shocks to inflation have decreased in volatility. Finally, we find evidence that inflation and money growth rates share similar regime shifts.

Keywords: inflation dynamics; monetary policy; Markov-switching models; unobserved component models; sthocastic trends (search for similar items in EconPapers)
JEL-codes: C22 E31 E42 E52 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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