Regional Inflation Dynamics and Inflation Targeting. The Case of Peru

Diego Winkelried and José Enrique Gutierrez

Journal of Applied Economics, 2015, vol. 18, issue 2, 199-224

Abstract: The Central Reserve Bank of Peru (BCRP) has been targeting inflation for more than a decade, using Lima's inflation as the operational measure. An alternative indicator is countrywide inflation, whose quality and real-time availability have improved substantially. Given these competing measures, two policy questions arise: What have been the implications for national inflation of targeting Lima's inflation? Would shifting to a national aggregate significantly affect the workings of monetary policy in Peru? To answer these questions, we estimate a large, but parsimonious, error correction model and investigate how regional shocks propagate across the country. The results indicate that a shock to Lima's inflation is transmitted fast and strongly elsewhere in the country, whereas the effects of shocks in other regions are limited and short-lived. This constitutes supporting evidence to the view that by targeting Lima's inflation, the BCRP has effectively, albeit indirectly, targeted national inflation.

Date: 2015
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DOI: 10.1016/S1514-0326(15)30009-X

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