The monetary policy transmission mechanism in a financial dollarization environment: the case of Peru between 1996 and 2006

This study examines the monetary policy transmission mechanism in the context of financial dollarization in Peru between 1996 and 2006, highlighting the importance of understanding these mechanisms given the challenges faced by the Central Bank in formulating effective policies. The study analyzes data on the evolution of monetary policy, transmission channels (interest rates, exchange rates, and expectations), and the impact of dollarization. The methodology includes the estimation of VAR models and panel analysis to evaluate the transmission mechanisms through various empirical exercises. The results indicate that the interest rate transmission channel has gained strength, while the pass-through of the exchange rate to inflation is relatively weak, at around 10%. In addition, the balance sheet effect is highlighted as a factor that may limit the effectiveness of monetary policy. The conclusions suggest that a reduction in financial dollarization could significantly strengthen monetary transmission channels, underscoring the need for appropriate policy design that takes into account the risks associated with dollarization. (Abstract and audio: Department of Economic Publications)