Impact of monetary policy shocks in the Peruvian economy over time

Flavio Pérez Rojo and Gabriel Rodríguez

Structural Change and Economic Dynamics, 2024, vol. 71, issue C, 270-288

Abstract: We investigate the evolution of the impact of monetary policy (MP) shocks in Peru in 1996Q1-2018Q2 using a set of time-varying parameter VAR models with stochastic volatility (TVP-VAR-SV), as proposed by Chan and Eisenstat (2018). The main results are: (i) the volatility of MP shocks falls during the Inflation Targeting (IT) regime; (ii) a contractionary MP shock decreases both GDP growth and inflation within a five quarters time span; (iii) the interest rate reacts faster to aggregate supply shocks than to both aggregate demand shocks and exchange rate shocks; (iv) under the pre-IT regime, MP shocks explain 20%, 10%, and 85% of the uncertainty in GDP growth, inflation, and the interest rate, respectively; and under the IT regime, all these percentages shrink to 1%–2%. The sensitivity analysis confirms the robustness of the main results. In general, the results show that MP has contributed to diminishing macroeconomic volatility in Peru.

Keywords: Time-varying parameter VAR; Stochastic volatility; Marginal likelihood; Deviance information criterion; Monetary policy; Peru (search for similar items in EconPapers)
JEL-codes: C32 E32 E51 E52 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:71:y:2024:i:c:p:270-288

DOI: 10.1016/j.strueco.2024.08.003

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