Does the Central Bank of Peru Respond to Exchange Rate Movements? A Bayesian Estimation of a New Keynesian DSGE Model with FX Interventions

Gabriel Rodríguez, Paul Castillo and Harumi Hasegawa
Additional contact information
Harumi Hasegawa: Pontificia Universidad Católica de Chile

No 2021-504, Documentos de Trabajo / Working Papers from Departamento de Economía - Pontificia Universidad Católica del Perú

Abstract: This paper assess the role played by the exchange rate and FX intervention in setting monetary policy interest rates in Peru. We estimate a Taylor rule that includes inflation, output gap and the exchange rate using a New Keynesian DSGE model that follows closely Schmitt-Grohé and Uribe (2017). The model is extended to include an explicit sterilized FX intervention rule as in Faltermeier et al. (2017). The main empirical results show, for the pre Inflation Targeting (IT) and IT periods, that the model that clearly outperforms in terms of marginal log density, features a Taylor rule that does not respond to changes in the nominal exchange rate and an active use of FX intervention by the Central Bank. We also find that the coefficient associated with the response of the Taylor rule to inflation is close to 2 and the one associated with the output gap is greater than 1; and that FX intervention has become more responsive to exchange rate fluctuations during the IT period. Finally, the estimated IRFs shows that FX intervention has contributed to reduce the volatility of GDP in response to productivity and terms of trade shocks in Peru. JEL Classification-JE: C22, C52, F41.

Keywords: Small Open Economy; Taylor Rule; Monetary Policy Rule; Exchange Rate; Bayesian Methodology; Peruvian Economy; FX interventions; New Keynesian DSGE Model. (search for similar items in EconPapers)
Pages: 45
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published

Downloads: (external link)
https://doi.org/10.18800/2079-8474.0504 (application/pdf)

Related works:
Journal Article: Does the Central Bank of Peru respond to exchange rate movements? A Bayesian estimation of a New Keynesian DSGE model with FX interventions (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pcp:pucwps:wp00504

Access Statistics for this paper

More papers in Documentos de Trabajo / Working Papers from Departamento de Economía - Pontificia Universidad Católica del Perú Av. Universitaria 1801, San Miguel, Lima, Perú. Contact information at EDIRC.
Bibliographic data for series maintained by ().