Castillo, Paul () (Banco Central de Reserva del Perú) Montoro, Carlos () (Banco Central de Reserva del Perú) Tuesta, Vicente (Banco Central de Reserva del Perú)
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This paper develops a dynamic stochastic general equilibrium model, which is calibrated for the Peruvian economy and can be useful for the design and analysis of monetary policy. The model includes a second currency that replaces partially the domestic currency in its functions of unit of account, medium of payment and reserve of value; phenomenon known in the economic literature as partial dollarization. We also include certain real, nominal and financial rigidities to replicate the empirical regularities of the Peruvian macroeconomic data. The model reproduces relatively well the main stylized facts of the Peruvian economy. Moreover, we show how dollarization reduces the power of monetary policy to affect output and increase the vulnerability of the economic activity to foreign shocks. Furthermore, we perform some exercises that show the importance of credibility in the actions of the monetary authority to anchor expectations and to reduce deviation in the inflation rate.
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Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number
2009-003.
Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis