From the “Great Inflation” to the “Great Moderation” in Peru: A Time Varying Structural Vector Autoregressions Analysis

Paul Castillo, Jimena Montoya and Ricardo Quineche

No 2016-003, Working Papers from Banco Central de Reserva del Perú

Abstract: Over the last 30 years, the Peruvian economy has shown a dramatic decrease in the volatility of its macroeconomic aggregates. Following Primiceri (2005), Benati (2008) and Galí and Gambetti (2009), a Bayesian structural vector autoregression with time-varying parameters and variance covariance matrix of the innovations is used to analyse the underlying causes of Peruvian "Great Moderation". The Peruvian economy is modelled using real GDP growth, inflation and the rate of growth of M1 (money base). Our main results show: (1) Monetary policy has contributed significantly to the "Great Moderation" by reducing the volatility of its non-systematic component and by changing its reaction function to demand and supply shocks; (2) Structural reforms also contributed to reduce the responsiveness of GDP and inflation to demand and supply shocks; (3) During the period of high volatility, supply and policy shocks were the most important determinants of macroeconomic instability.

Keywords: time varying coe¢ cients; multivariate stochastic volatility; Gibbs sampling; systematic monetary policy; monetary policy shocks; identi cation (search for similar items in EconPapers)
JEL-codes: C15 C22 E23 E24 E31 E32 E47 E52 E58 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-lam, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:rbp:wpaper:2016-003

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