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Non-Linear Effects of Monetary Policy and Real Exchange Rate Shocks in Partially Dollarized Economies: An Empirical Study for Peru

  • Saki Bigio

    ()

    (New York University and Central Bank of Peru)

  • Jorge Salas

    ()

    (Central Bank of Peru)

We study whether monetary policy and real exchange rate shocks have non-linear effects on output and inflation in a partially dollarized economy such as Peru. For this purpose, we use a Smooth Transition Vector Autoregression methodology and then report impulse-response functions for shocks of different sign and size, and conditional to the initial position in the business cycle. We find evidence of non-linearities which imply a convex aggregate supply curve: in particular, monetary policy is more likely to affect the output during recessions than in booms, while the opposite is found for the inflation. Regarding real exchange rate shocks, we show that depreciations have greater negative effects during economic downturns and a higher pass-through rate in the positive side of the business cycle.

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Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2006-008.

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Date of creation: Aug 2006
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Handle: RePEc:rbp:wpaper:2006-008
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