Time-varying transmission of external shocks in Peru: Reassessing the role of monetary policy

Gabriel Rodríguez, Paul Castillo B., Brenda Guevara Ruiz and Leonela Yamuca Salvatierra

Economic Modelling, 2025, vol. 152, issue C

Abstract: This paper analyzes how the transmission of external shocks to inflation, output, and interest rates in Peru has evolved over the past two decades. Although the literature has emphasized the relevance of terms-of-trade and global financial shocks for emerging markets, limited attention has been paid to how these transmission mechanisms change over time. Using quarterly data from 1998 to 2019, the analysis employs a time-varying parameter VAR model with stochastic volatility and mixture innovations to identify changes in three key blocks: autoregressive coefficients, shock variances, and contemporaneous responses. The results indicate a marked decline in the volatility of monetary policy shocks following the adoption of inflation targeting in 2002, along with a shift in inflation’s sensitivity to external shocks—weakening in response to the international interest rate and strengthening in response to Chinese output growth. These patterns reflect improvements in monetary policy credibility and shifts in trade exposure. Robustness exercises confirm the stability of the main findings across alternative specifications.

Keywords: External shocks; Macroeconomic fluctuations; Time-varying parameter VAR; Stochastic volatility; Mixture innovation; Peru (search for similar items in EconPapers)
JEL-codes: C32 C52 E31 F41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:152:y:2025:i:c:s0264999325002366

DOI: 10.1016/j.econmod.2025.107241

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