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Preferences of the Central Reserve Bank of Peru and optimal monetary policy rules in the inflation targeting regime

Author

Listed:
  • Cabrera, Nilda

    () (PUC-RJ, Brazil)

  • Bejarano, Edilean

    () (UFPb, Brazil)

  • Savino Portugal, Marcelo

    () (UFRGS, Brazil and CNPq)

Abstract

This study aims to identify the preferences of the monetary authority in the Peruvian regime of inflation targeting through the derivation of optimal monetary policy rules. To achieve that, we used a calibration strategy based on the choice of values of the parameters of preferences that minimize the square deviation between the true interest rate and interest rate optimal simulation. The results showed that the monetary authority has applied a system of flexible inflation targeting, prioritizing the stabilization of inflation, but without disregarding gradualism in interest rates. On the other hand, concern over output stabilization has been minimal, revealing that the output gap has been important because it contains information about future inflation and not because it is considered a variable goal in itself. Finally, when the smoothing of the nominal exchange rate is considered in the loss function of the monetary authority, the rank order of preferences has been maintained and the smoothing of the exchange rate proved insignificant.

Suggested Citation

  • Cabrera, Nilda & Bejarano, Edilean & Savino Portugal, Marcelo, 2011. "Preferences of the Central Reserve Bank of Peru and optimal monetary policy rules in the inflation targeting regime," Working Papers 2011-010, Banco Central de Reserva del Perú.
  • Handle: RePEc:rbp:wpaper:2011-010
    as

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    File URL: http://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2011/Documento-de-Trabajo-10-2011.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Inflation target; Central Bank preferences; Optimal monetary policy rules; Central Bank of Peru.;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • 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

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