Monetary Rules for Peru

This article examines the properties of two monetary rules in the context of Peru’s monetary policy between 1994 and 1999—specifically, one rule targeting nominal Gross Domestic Product (GDP) growth and another targeting inflation—using the monetary base as the policy instrument. The methodology is based on counterfactual historical simulations to assess how the monetary base and nominal GDP would have evolved had these rules been applied during the analyzed period. The results show that the inflation-targeting rule is significantly more effective at stabilizing inflation compared to the nominal GDP growth rule, resulting in lower volatility in the growth of the monetary base. Furthermore, it is noted that, although monetary policy in general would have exhibited an expansionary bias during certain periods, explicit rules outweigh implicit ones in terms of convergence toward the targets, despite generating greater variability in the growth rate of the monetary base. This suggests that adopting an inflation-targeting approach could be more beneficial for the conduct of monetary policy in Peru. (Abstract and audio: Department of Economic Publications)