Impact of Monetary Policy Shocks in the Peruvian Economy Over Time
Abstract
We investigate the evolution of the impact of monetary policy (MP) shocks in Peru in 1996Q1-2018Q2 using a set of time-varying parameter vector autoregressive models with stochastic volatility (TVP-VAR-
SV), as proposed by Chan and Eisenstat (2018). The main results are: (i) the volatilities, intercepts, and
contemporaneous coe cients change more gradually than VAR coe cients over time; (ii) the volatility
of MP shocks falls from 4% to 0.3% on average during the In ation Targeting (IT) regime; (iii) in the
long run, a contractionary MP shock decreases both gross domestic product (GDP) growth and in ation
by 0.28% and 0.1%, respectively; (iv) the interest rate reacts faster to aggregate supply shocks than
to both aggregate demand shocks and exchange rate shocks; (v) under the pre-IT regime, MP shocks
explain almost 20%, 10%, and 85% of the uncertainty in GDP growth, in ation, and the interest rate,
respectively; and under the IT regime, all these percentages shrink to 1-2%. The sensitivity analysis
con rms the robustness of the main results across various prior speci cations, measures of external and domestic variables, and recursive identi cations. In general, the results show that MP has contributed to diminishing macroeconomic volatility in Peru.
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