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The monetary policy transmission mechanism under financial dollarization: the case of Peru 1996-2006

Renzo Rossini and Marco Vega

No 2007-017, Working Papers from Banco Central de Reserva del Perú

Abstract: This paper analyzes the changes in the monetary policy transmission mechanism in Peru. A strong conclusion that emerges from this research is that both, the direct interest rate channel and the expectations channel have become more important in the recent years, especially after the Inflation Targeting adoption. The research further explores the implications of financial dollarization for the practice of monetary policy by performing two exercises. First, it compares different degrees of exchange rate flexibility and finds out that the more flexible the exchange rate is, the quicker but weaker the exchange rate pass-through becomes. Second, since financial dollarization may trigger contractionary depreciations, the document studies implications for monetary policy. The conclusion is that the effectiveness of monetary policy can be further improved if the economy becomes less dollarized.

Keywords: Transmission Channels; Financial dollarization; Monetary Policy; Emerging Markets. (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Date: 2007-11
New Economics Papers: this item is included in nep-cba, nep-lam, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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