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Regional inflation dynamics and inflation targeting in Peru

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Author Info

  • Winkelried, Diego

    (Banco Central de Reserva del Perú)

  • Gutierrez, José Enrique

    (Superintendency of Banking, Insurance and Private Pension Funds)

Abstract

The Central Reserve Bank of Peru (BCRP) has been targeting inflation for more than a decade, using Lima’s inflation as the operational measure. An alternative indicator is countrywide inflation, whose quality and real-time availability have improved substantially lately. Hence, given these two somehow competing measures of inflation, two interesting policy questions arise: what have been the implications for national inflation of targeting Lima’s inflation? Would shifting to a national aggregate significantly affect the workings of monetary policy in Peru? To answer these questions, we estimate an error correction model of regional inflations and investigate how shocks propagate across the country. The model incorporates (i) aggregation restrictions whereby each regional inflation is affected by an aggregate of neighboring regions, and (ii) long-run restrictions that uncover a single common trend in the system. The results indicate that a shock to Lima’s inflation is transmitted fast and strongly elsewhere in the country. This constitutes supporting evidence to the view that by targeting Lima’s inflation, the BCRP has effectively, albeit indirectly, targeted national inflation.

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Bibliographic Info

Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2012-018.

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Date of creation: Oct 2012
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Handle: RePEc:rbp:wpaper:2012-018

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Postal: Jr. Miro Quesada 441, Lima
Phone: 427-6250 ext. 3841
Fax: 426-6125
Web page: http://www.bcrp.gob.pe
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Related research

Keywords: Regional inflation; inflation targeting; relative PPP; error correction model;

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  1. Park, Joon Y. & Phillips, Peter C.B., 1988. "Statistical Inference in Regressions with Integrated Processes: Part 1," Econometric Theory, Cambridge University Press, vol. 4(03), pages 468-497, December.
  2. Peter C.B. Phillips, 1985. "Understanding Spurious Regressions in Econometrics," Cowles Foundation Discussion Papers 757, Cowles Foundation for Research in Economics, Yale University.
  3. Adrian Armas & Lucy Vallejos & Marco Vega, 2010. "Measurement of price indices used by the central bank of Peru," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy and the measurement of inflation: prices, wages and expectations, volume 49, pages 259-283 Bank for International Settlements.
  4. Álvaro Monge & Diego Winkelried, 2009. "PPC y convergencia de precios: un análisis para las ciudades del Perú," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  5. Guenter W. Beck & Kirstin Hubrich & Massimiliano Marcellino, 2009. "Regional inflation dynamics within and across euro area countries and a comparison with the United States," Economic Policy, CEPR & CES & MSH, vol. 24, pages 141-184, 01.
  6. Fabio Busetti & Silvia Fabiani & Andrew Harvey, 2006. "Convergence of Prices and Rates of Inflation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(s1), pages 863-877, December.
  7. Stephen G. Cecchetti & Nelson C. Mark & Robert J. Sonora, 2002. "Price Index Convergence Among United States Cities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1081-1099, November.
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