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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.

Suggested Citation

  • Paúl Castillo & Alberto Humala & Vicente Tuesta, 2012. "Regime shifts and inflation uncertainty in Peru," Journal of Applied Economics, Universidad del CEMA, vol. 15, pages 71-87, May.
  • Handle: RePEc:cem:jaecon:v:15:y:2012:n:1:p:71-87
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    Citations

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    Cited by:

    1. Claudiu T. Albulescu & Aviral Kumar Twari & Stephen M. Miller & Rangan Gupta, 2015. "Time-Frequency Relationship between Inflation and Inflation Uncertainty for the U.S.: Evidence from Historical Data," Working Papers 201591, University of Pretoria, Department of Economics.
    2. Paul Castillo & Carlos Montoro & Vicente Tuesta, 2013. "An Estimated Stochastic General Equilibrium Model with Partial Dollarization: A Bayesian Approach," Open Economies Review, Springer, vol. 24(2), pages 217-265, April.
    3. Maertens Odria, Luís Ricardo & Castillo, Paul & Rodriguez, Gabriel, 2012. "Does the exchange rate pass-through into prices change when inflation targeting is adopted? The Peruvian case study between 1994 and 2007," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1154-1166.
    4. Daniel Barráez & Carolina Pagliacci, 2008. "Identificación de segmentos de precios en el mercado de fondos overnigth usando modelos ocultos de Markov," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(3), pages 339-359, julio-sep.
    5. Alberto Humala, 2008. "South American disinflation and regime switches: unobserved volatility components?," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(3), pages 405-425, julio-sep.
    6. Tuesta Vicente, 2007. "Independencia Legal y Efectiva del Banco Central de Reserva del Perú," Working Papers 2007-012, Banco Central de Reserva del Perú.
    7. James J. Heckman, 2008. "Causalidad econométrica," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(3), pages 291-338, julio-sep.
    8. Castillo, Paul & Montoya, Jimena & Quineche, Ricardo, 2016. "From the “Great Inflation” to the “Great Moderation” in Peru: A Time Varying Structural Vector Autoregressions Analysis," Working Papers 2016-003, Banco Central de Reserva del Perú.
    9. Manfred Esquivel Monge, 2008. "Histéresis en dolarización: evidencias de la economía costarricense," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(3), pages 361-403, julio-sep.

    More about this item

    Keywords

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

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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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