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The monetary policy transmission mechanism under financial dollarization: the case of Peru 1996-2006

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Author Info
Renzo Rossini () (Central Reserve Bank of Peru)
Marco Vega () (Central Reserve Bank of Peru)

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Abstract

This paper analyzes the changes in the monetary policy transmission mechanism in Peru. A strong conclusion that emerges from this research is that both, the direct interest rate channel and the expectations channel have become more important in the recent years, especially after the Inflation Targeting adoption. The research further explores the implications of financial dollarization for the practice of monetary policy by performing two exercises. First, it compares different degrees of exchange rate flexibility and finds out that the more flexible the exchange rate is, the quicker but weaker the exchange rate pass-through becomes. Second, since financial dollarization may trigger contractionary depreciations, the document studies implications for monetary policy. The conclusion is that the effectiveness of monetary policy can be further improved if the economy becomes less dollarized.

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File URL: http://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2007/Documento-Trabajo-17-2007.pdf
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Publisher Info
Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2007-017.

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Date of creation: Nov 2007
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Handle: RePEc:rbp:wpaper:2007-017

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Related research
Keywords: Transmission Channels; Financial dollarization; Monetary Policy; Emerging Markets.;

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Find related papers by JEL classification:
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
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. Peter Bofinger & Timo Wollmershäuser, 2003. "Managed Floating as a Monetary Policy Strategy," Economic Change and Restructuring, Springer, vol. 36(2), pages 81-109, June. [Downloadable!] (restricted)
  2. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen. [Downloadable!] (restricted)
    Other versions:
  3. León Fernández, David, 1999. "La información contenida en los agregados monetarios en el Perú," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 5. [Downloadable!]
  4. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," NBER Working Papers 12163, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Luis Carranza & Juan M. Cayo & José E. Galdón-Sánchez, 2003. "Exchange Rate Volatility and Economic Performance in Peru: A Firm Level Analysis," Faculty Working Papers 12/03, School of Economics and Business Administration, University of Navarra. [Downloadable!]
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  6. Amato, Jeffery D. & Gerlach, Stefan, 2002. "Inflation targeting in emerging market and transition economies: Lessons after a decade," European Economic Review, Elsevier, vol. 46(4-5), pages 781-790, May. [Downloadable!] (restricted)
    Other versions:
  7. Adolfo Barajas & Roberto Steiner, 2002. "Credit Stagnation in Latin America," IMF Working Papers 02/53, International Monetary Fund.
  8. Rossini Miñán, Renzo, 2001. "Aspectos de la adopción de un régimen de metas de inflación en el Perú," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 7. [Downloadable!]
  9. Moron, Eduardo & Winkelried, Diego, 2005. "Monetary policy rules for financially vulnerable economies," Journal of Development Economics, Elsevier, vol. 76(1), pages 23-51, February. [Downloadable!] (restricted)
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  10. Jeffrey A. Frankel & David C. Parsley & Shang-Jin Wei, 2005. "Slow Passthrough Around the World: A New Import for Developing Countries?," NBER Working Papers 11199, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. 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. [Downloadable!]
  12. Winkelried Quezada, Diego, 2004. "Tendencias comunes y análisis de la política monetaria en el Perú," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 11. [Downloadable!]
  13. Bringas, Paul & Tuesta, Vicente, 1997. "El superávit de encaje y los mecanismos de Transmisión de la política monetaria: una aproximación," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 1, pages 33-50. [Downloadable!]
  14. Diego Winkelried & Marco Vega, 2004. "How Does Global Disinflation Drag Inflation in Small Open Economies?," Econometric Society 2004 Latin American Meetings 76, Econometric Society. [Downloadable!]
    Other versions:
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