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Regional inflation spillovers and monetary policy design

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  • Aguilar, José
  • Quineche, Ricardo

Abstract

Should emerging market central banks anchor inflation targeting to capital cities or national aggregates? Peru's Central Reserve Bank has achieved Latin America's lowest inflation (2.96 % average annual between 2001 and 2024) using Lima's CPI—an uncommon choice raising equity concerns. Using frequency-domain spillover analysis on monthly data (2002–2024) across nine regions, we find Lima dominates long-run transmission (NET: 27.23 pp) but absorbs short-run agricultural shocks. We recommend maintaining Lima-centered targeting while integrating upstream food-region signals into forecasts and developing crisis-adaptive frameworks. These findings validate Peru's approach and provide actionable guidance for spatially heterogeneous inflation-targeting economies.

Suggested Citation

  • Aguilar, José & Quineche, Ricardo, 2026. "Regional inflation spillovers and monetary policy design," Journal of Policy Modeling, Elsevier, vol. 48(2), pages 468-488.
    • Handle: RePEc:eee:jpolmo:v:48:y:2026:i:2:p:468-488
    DOI: 10.1016/j.jpolmod.2025.10.003
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • 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

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