Impacts and evolution of monetary policy shocks on macroeconomic fluctuations in Peru using regime-switching VAR models

This paper applies regime-switching VAR models with time-varying parameters and variances to analyze the impact and evolution of monetary policy shocks and their contribution to GDP growth, inflation, and the interest rate in Peru over 1994Q3–2019Q4. The approach offers an alternative and complementary perspective to Pérez Rojo and Rodrıguez (2024). The main findings are: (i) the best-fitting models incorporate regime-switching volatility; (ii) two distinct regimes emerge, coinciding with the adoption of inflation targeting (IT); (iii) the volatility of GDP growth and inflation began to decline in the early 1990s, while interest rate volatility fell sharply after IT implementation; and (iv) prior to IT, monetary policy shocks explained 15%, 30%, and 90% of the long-term forecast error variance decomposition of inflation, GDP growth, and the interest rate, respectively, but their contribution became negligible thereafter. Overall, the results are robust across alternative specifications, underscoring the stabilizing role of IT in Peru’s monetary policy framework.