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Regional Inflation Spillovers and Monetary Policy Design: Evidence from Peru's Successful Inflation-Targeting Framework

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  • Aguilar, José
  • Quineche, Ricardo

Abstract

Despite being an emerging economy, Peru has achieved superior post-pandemic disinflation compared to major developed economies, making its regional inflation dynamics globally instructive for monetary policy design. This study investigates Lima's suitability as Peru's inflation-targeting anchor by analyzing regional spillovers across nine economic regions using monthly CPI data (2002-2024). Employing both Diebold-Yilmaz time-domain and Baruník-Křehlík frequency-domain frameworks, we quantify the direction, magnitude, and persistence of inflation transmission. Results reveal strong regional interdependence (73.60% total spillover index) with Lima as the dominant net transmitter (23.94 percentage points). However, frequency decomposition uncovers striking cyclical heterogeneity: Lima receives short-run shocks from food-producing regions but dominates long-run transmission (44.70% vs. 28.99% frequency spillover index). Rolling-window analysis during COVID-19 shows temporary spillover disruption (connectivity declining from 75% to 68%) followed by recovery during 2022's inflationary surge. Robustness checks across specifications, granular city-level data, and three-band frequency segmentation confirm Lima's structural centrality at lower frequencies. These findings validate the Central Reserve Bank's Lima-centered approach for long-run targeting while revealing asymmetric frequency-dependent spillovers. The presence of short-run regional shocks suggests integrating upstream agricultural signals could enhance near-term forecasting and policy responsiveness.

Suggested Citation

  • Aguilar, José & Quineche, Ricardo, 2025. "Regional Inflation Spillovers and Monetary Policy Design: Evidence from Peru's Successful Inflation-Targeting Framework," MPRA Paper 125442, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:125442
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    References listed on IDEAS

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

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