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Monetary Policy, Regime Shifts, and Inflation Uncertainty in Peru (1949-2006)

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Author Info
Paul Castillo () (Central Reserve Bank of Peru)
Alberto Humala () (Central Reserve Bank of Peru)
Vicente Tuesta () (Central Reserve Bank of Peru)

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Abstract

This paper evaluates the link between inflation and inflation uncertainty in a context of monetary policy regime shifts for the Peruvian economy. We use a model of unobserved components subject to regime shifts to evaluate this link. We verify that periods of high(low) inflation me an were accompanied by periods of high(low) both short -and long- run uncertainty in inflation. Interestingly, unlike developed countries, short run uncertainty is important. These relationaships are consistent with the presence of three clearly differentiated regimes. First, a period of price stability, then a high -inflation high-volatility regime, and finally a hyperinflation period. We also verify that during a recent period of price stability, both permanent and transitory shocks to inflation have decreased in volatility. Finally, we find evidence that inflation and money growth rates share similar regime shifts.

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Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2007-005.

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Date of creation: Mar 2007
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Handle: RePEc:rbp:wpaper:2007-005

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Related research
Keywords: inflation dynamics; monetary policy; Markov-switching models; unobserved component models; sthocastic trends;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
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    Other versions:
  2. Kevin J. Lansing, 2006. "Time-Varying U.S. Inflation Dynamics and the New Keynesian Phillips Curve," Computing in Economics and Finance 2006 488, Society for Computational Economics. [Downloadable!]
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  5. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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  18. George J. Bratsiotis & Jakob Madsen & Christopher Martin, 2002. "Inflation Targeting and Inflation Persistence," Public Policy Discussion Papers 02-12, Economics and Finance Section, School of Social Sciences, Brunel University. [Downloadable!]
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  19. Kim, Chang-Jin, 1993. "Unobserved-Component Time Series Models with Markov-Switching Heteroscedasticity: Changes in Regime and the Link between Inflation Rates and Inflation Uncertainty," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 341-49, July.
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  21. Martin Evans & Paul Wachtel, 1993. "Inflation regimes and the sources of inflation uncertainty," Proceedings, Federal Reserve Bank of Cleveland, pages 475-520.
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  23. Adrián Armas & Francisco Grippa, 2005. "Targeting Inflation in a Dollarized Economy: The Peruvian Experience," RES Working Papers 4423, Inter-American Development Bank, Research Department. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rodriguez Gabriel, 2007. "Efficiency of the Monetary Policy and Stability of Central Bank Preferences. Empirical Evidence for Peru," Working Papers 2007-008, Banco Central de Reserva del Perú. [Downloadable!]
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