Common trends and analysis of monetary policy in Peru

This study examines the transmission mechanisms of monetary policy in Peru, assessing how the Central Bank’s actions influence aggregate spending and inflation. Using an error correction model (ECM) and a vector autoregression (VAR) analysis, the study analyzes monthly data from January 1993 through April 2003. Three cointegration relationships are identified that describe the long-run equilibrium, and it is demonstrated that a 1 percentage point increase in the nominal interest rate leads, one year later, to a nominal appreciation of 0.5–0.75 percent, a slowdown in output of 0.5–0.6 percent, and a decrease in inflation of 0.2–0.3 percent. Furthermore, evidence of an interest rate channel is found, suggesting that monetary policy operates through this channel in an environment of dollarization. This finding has important implications for the design of monetary policy, underscoring the need to consider effects on both the domestic currency and the dollarized currency. (Abstract and audio: Department of Economic Publications)