The Information Contained in Monetary Aggregates in Peru

This article examines the effectiveness of monetary aggregates in controlling inflation in Peru, within the context of a monetary framework that was reformed beginning in 1990. The research focuses on the question of whether the monetary base, as the most restrictive monetary aggregate, is more effective at controlling inflation compared to broader aggregates. Using monthly data from 1991 and dynamic causality techniques, the study finds that narrower monetary aggregates—particularly domestic currency in circulation—are significantly more effective at predicting and controlling changes in the Consumer Price Index (CPI). This contrasts with previous findings that suggested broader aggregates were more indicative in this regard. The research highlights the neutrality of money—in the sense that no monetary aggregate robustly explains the variability in real output. The key policy implications suggest that to achieve price stability, the Central Bank should prioritize the management of currency in circulation and other narrower aggregates within its monetary strategy. (Abstract and audio: Department of Economic Publications)