Evolution of Monetary Policy in Peru: An Empirical Application Using a Mixture Innovation TVP-VAR-SV Model*

Metas de Inflación en Una Economía Dolarizada: La Experencia Del Perú

Jhonatan Portilla, Gabriel Rodríguez and Paul Castillo

CESifo Economic Studies, 2022, vol. 68, issue 1, 98-126

Abstract: This article discusses the evolution of monetary policy (MP) in Peru in 1996Q1–2019Q4 using a mixture innovation time-varying parameter vector autoregressive (VAR) model with stochastic volatility (TVP-VAR-SV) as proposed by Koop, Leon-Gonzales and Strachan. The main empirical results are: (i) the VAR coefficients and volatilities change more gradually than the contemporaneous coefficients over time; (ii) the volatility of MP shocks was higher under the pre-Inflation Targeting (IT) regime; (iii) a surprise increase in the interest rate produces gross domestic product (GDP) growth falls and reduces inflation in the long run; (iv) the interest rate reacts more quickly to aggregate supply shocks than to aggregate demand shocks; (v) MP shocks explain a high percentage of domestic variables behavior under the pre-IT regime but their contribution decreases under the IT regime. Overall, these results show that MP has contributed in Peru to lower macroeconomic volatility by (i) reducing average long-term inflation, (ii) increasing the response of GDP growth rate to interest rate, and (iii) by becoming more predictable. (JEL codes: C11, C32, and E52).

Keywords: monetary policy; TVP-VAR-SV; Bayesian estimation; mixture innovation model; peruvian economy (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (9)

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Working Paper: Evolution of Monetary Policy in Peru: An Empirical Application using a Mixture Innovation TVP-VAR-SV Model (2020)
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