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Time-varying transmission of external shocks in Peru: Reassessing the role of monetary policy

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  • Rodríguez, Gabriel
  • Castillo B., Paul
  • Guevara Ruiz, Brenda
  • Yamuca Salvatierra, Leonela

Abstract

This paper analyzes how the transmission of external shocks to inflation, output, and interest rates in Peru has evolved over the past two decades. Although the literature has emphasized the relevance of terms-of-trade and global financial shocks for emerging markets, limited attention has been paid to how these transmission mechanisms change over time. Using quarterly data from 1998 to 2019, the analysis employs a time-varying parameter VAR model with stochastic volatility and mixture innovations to identify changes in three key blocks: autoregressive coefficients, shock variances, and contemporaneous responses. The results indicate a marked decline in the volatility of monetary policy shocks following the adoption of inflation targeting in 2002, along with a shift in inflation’s sensitivity to external shocks—weakening in response to the international interest rate and strengthening in response to Chinese output growth. These patterns reflect improvements in monetary policy credibility and shifts in trade exposure. Robustness exercises confirm the stability of the main findings across alternative specifications.

Suggested Citation

  • Rodríguez, Gabriel & Castillo B., Paul & Guevara Ruiz, Brenda & Yamuca Salvatierra, Leonela, 2025. "Time-varying transmission of external shocks in Peru: Reassessing the role of monetary policy," Economic Modelling, Elsevier, vol. 152(C).
    • Handle: RePEc:eee:ecmode:v:152:y:2025:i:c:s0264999325002366
    DOI: 10.1016/j.econmod.2025.107241
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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