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Regional inflation dynamics and inflation targeting in Peru

Author

Listed:
  • Winkelried, Diego

    (Banco Central de Reserva del Perú)

  • Gutierrez, José Enrique

    (Superintendency of Banking, Insurance and Private Pension Funds)

Abstract

The Central Reserve Bank of Peru (BCRP) has been targeting inflation for more than a decade, using Lima’s inflation as the operational measure. An alternative indicator is countrywide inflation, whose quality and real-time availability have improved substantially lately. Hence, given these two somehow competing measures of inflation, two interesting policy questions arise: what have been the implications for national inflation of targeting Lima’s inflation? Would shifting to a national aggregate significantly affect the workings of monetary policy in Peru? To answer these questions, we estimate an error correction model of regional inflations and investigate how shocks propagate across the country. The model incorporates (i) aggregation restrictions whereby each regional inflation is affected by an aggregate of neighboring regions, and (ii) long-run restrictions that uncover a single common trend in the system. The results indicate that a shock to Lima’s inflation is transmitted fast and strongly elsewhere in the country. This constitutes supporting evidence to the view that by targeting Lima’s inflation, the BCRP has effectively, albeit indirectly, targeted national inflation.

Suggested Citation

  • Winkelried, Diego & Gutierrez, José Enrique, 2012. "Regional inflation dynamics and inflation targeting in Peru," Working Papers 2012-018, Banco Central de Reserva del Perú.
  • Handle: RePEc:rbp:wpaper:2012-018
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Regional inflation; inflation targeting; relative PPP; error correction model;
    All these keywords.

    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
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • 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
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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