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Regime shifts and inflation uncertainty in Peru

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Abstract

The link between inflation and inflation uncertainty is evaluated using Peruvian data, in a context of changing monetary policies because of regime shifts. A Markov regime-switching heteroskedasticity model that includes unobserved components is used. The model shows how periods of high (low) inflation accompany periods of high (low) short- and long-run uncertainty in inflation. The results of the model also illustrate how, during the recent period of price stability in Peru, both permanent and transitory shocks in inflation show a decrease in volatility. Finally, a time-varying measure of inflation uncertainty is derived from the estimates, giving additional evidence on the positive link between the level of inflation and its uncertainty.

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File URL: http://www.ucema.edu.ar/publicaciones/download/volume15/castillo.pdf
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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): XV (2012)
Issue (Month): (May)
Pages: 71-87

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Handle: RePEc:cem:jaecon:v:15:y:2012:n:1:p:71-87

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Related research

Keywords: inflation dynamics; monetary policy; Markov-switching models; unobserved components models; stochastic trends;

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Cited by:
  1. Paul Castillo & Carlos Montoro & Vicente Tuesta, 2006. "An Estimated Stochastic General Equilibrium Model with Partial Dollarization: A Bayesian Approach," Working Papers Central Bank of Chile 381, Central Bank of Chile.
  2. Paul Castillo & Luis Maertens Odria & Gabriel Rodríguez, 2011. "Does The Exchange Rate Pass-Through Into Prices Change When Inflation Targeting Is Adopted? The Peruvian Case Study Between 1994 And 2007," Documentos de Trabajo 2011-314, Departamento de Economía - Pontificia Universidad Católica del Perú.
  3. Tuesta Vicente, 2007. "Independencia Legal y Efectiva del Banco Central de Reserva del Perú," Working Papers 2007-012, Banco Central de Reserva del Perú.

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