Regional inflation dynamics and inflation targeting in Peru

Diego Winkelried and José Enrique Gutierrez
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José Enrique Gutierrez: Superintendency of Banking, Insurance and Private Pension Funds

No 2012-018, Working Papers from Banco Central de Reserva del Perú

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 lately. Hence, given these two somehow competing measures of inflation, two interesting 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 an error correction model of regional inflations and investigate how shocks propagate across the country. The model incorporates (i) aggregation restrictions whereby each regional inflation is affected by an aggregate of neighboring regions, and (ii) long-run restrictions that uncover a single common trend in the system. The results indicate that a shock to Lima’s inflation is transmitted fast and strongly elsewhere in the country. This constitutes supporting evidence to the view that by targeting Lima’s inflation, the BCRP has effectively, albeit indirectly, targeted national inflation.

Keywords: Regional inflation; inflation targeting; relative PPP; error correction model (search for similar items in EconPapers)
JEL-codes: C32 C50 E31 E52 R10 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-geo, nep-mac and nep-mon
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