Regional Inflation Spillovers and Monetary Policy Design: Evidence from Peru's Successful Inflation-Targeting Framework

José Aguilar and Ricardo Quineche

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: Despite being an emerging economy, Peru has achieved superior post-pandemic disinflation compared to major developed economies, making its regional inflation dynamics globally instructive for monetary policy design. This study investigates Lima's suitability as Peru's inflation-targeting anchor by analyzing regional spillovers across nine economic regions using monthly CPI data (2002-2024). Employing both Diebold-Yilmaz time-domain and Baruník-Křehlík frequency-domain frameworks, we quantify the direction, magnitude, and persistence of inflation transmission. Results reveal strong regional interdependence (73.60% total spillover index) with Lima as the dominant net transmitter (23.94 percentage points). However, frequency decomposition uncovers striking cyclical heterogeneity: Lima receives short-run shocks from food-producing regions but dominates long-run transmission (44.70% vs. 28.99% frequency spillover index). Rolling-window analysis during COVID-19 shows temporary spillover disruption (connectivity declining from 75% to 68%) followed by recovery during 2022's inflationary surge. Robustness checks across specifications, granular city-level data, and three-band frequency segmentation confirm Lima's structural centrality at lower frequencies. These findings validate the Central Reserve Bank's Lima-centered approach for long-run targeting while revealing asymmetric frequency-dependent spillovers. The presence of short-run regional shocks suggests integrating upstream agricultural signals could enhance near-term forecasting and policy responsiveness.

Keywords: Inflation spillovers; Regional inflation dynamics; Baruník-Křehlík framework; Diebold-Yilmaz methodology; Frequency-domain analysis (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cba, nep-inv and nep-mon
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