Time Changing Effects of External Shocks on Macroeconomic Fluctuations in Peru: Empirical Application Using Regime-Switching VAR Models with Stochastic Volatility

Gabriel Rodríguez and Paulo Chávez
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Paulo Chávez: Pontificia Universidad Católica del Perú.

No 2022-509, Documentos de Trabajo / Working Papers from Departamento de Economía - Pontificia Universidad Católica del Perú

Abstract: This article quantifies and analyzes the evolving impact of external shocks on Peru’s macroeconomic fluctuations in 1994Q1-2019Q4. For this purpose, we use a group of models with regimeswitching time-varying parameters and stochastic volatility (RS-VAR-SV), as proposed by Chan and Eisenstat (2018). The data suggest a model with contemporaneous coefficients and constant lags and intercepts, but with regime-switching variances; and point to the existence of two regimes. The IRFs, FEVDs, and HDs show that: (i) China growth shocks have a higher impact on Peru’s output growth (around 0.8%); (ii) financial shocks contract domestic output growth by 0.3% and domestic monetary policy is synchronized with Fed rate movements; (iii) external shocks explain 35% and 70% of output fluctuations under regimes 1 and 2, respectively; and (iv) China growth shocks contributed 1.0 p.p. to the 1.1-p.p. increase (around 89%) in Peru’s output growth between regimes 1 and 2. Additionally, we validate these results by performing seven robustness exercises consisting in changing priors, reordering variables, changing variables, and using four different specications for the baseline model. JEL Classification-JE: : C11, C32, C52, E32, F41.

Keywords: External Shocks; Macroeconomic Fluctuations; Regime-Switching Autoregressive Vectors; Stochastic Volatility; Model Comparison; Peruvian Economy. (search for similar items in EconPapers)
Pages: 52
Date: 2022
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Journal Article: Time changing effects of external shocks on macroeconomic fluctuations in Peru: empirical application using regime-switching VAR models with stochastic volatility (2023)
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