From Monetary Targets to Inflation Targets in a Partially Dollarized Economy: The Peruvian Case

This article examines Peru’s transition from a monetary-target regime to an inflation-targeting framework, taking into account the partial dollarization of its economy. The study addresses the effectiveness of monetary policy in controlling inflation, highlighting the importance of establishing a specific inflation target as a means of increasing the transparency and credibility of the Central Reserve Bank of Peru (BCRP). Using monthly data from 1991 to 2000, the study employs structural and VAR models to analyze the relationship between monetary aggregates and the inflation rate, finding that traditional measures of the monetary base have a significant impact on inflation with time lags of between 8 and 16 months. The results suggest that, given the context of macroeconomic stabilization, a gradual shift toward inflation targeting could foster better communication with the public and anchor inflation expectations. Implementing this framework would also entail shifting the operational target toward more flexible parameters that facilitate the management of external shocks and enhance the credibility of the BCRP’s economic policy. (Abstract and audio: Department of Economic Publications)