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Regime shifts and inflation uncertainty in Peru

Paul Castillo (), Alberto Humala () and Vicente Tuesta ()

Journal of Applied Economics, 2012, vol. 15, 71-87

Abstract: The link between inflation and inflation uncertainty is evaluated using Peruvian data, in a context of changing monetary policies because of regime shifts. A Markov regime-switching heteroskedasticity model that includes unobserved components is used. The model shows how periods of high (low) inflation accompany periods of high (low) short- and long-run uncertainty in inflation. The results of the model also illustrate how, during the recent period of price stability in Peru, both permanent and transitory shocks in inflation show a decrease in volatility. Finally, a time-varying measure of inflation uncertainty is derived from the estimates, giving additional evidence on the positive link between the level of inflation and its uncertainty.

Keywords: inflation dynamics; monetary policy; Markov-switching models; unobserved components models; stochastic trends (search for similar items in EconPapers)
JEL-codes: C22 E31 E42 E52 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:cem:jaecon:v:15:y:2012:n:1:p:71-87

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