What explains inflation fluctuations in Peru during the 2002–2008 period? Evidence from a structural VAR analysis

This paper conducts a historical decomposition of Peruvian inflation using a structural VAR model identified with long-run constraints. Through this exercise, we estimate the contribution of various sources of domestic and external shocks to the observed evolution of inflation from the adoption of the inflation-targeting regime in Peru (2002) through the second quarter of 2008. The results indicate that domestic demand shocks were the most significant in the first part of the sample period (up to approximately 2005), while subsequently, external shocks—associated with foreign inflation and the terms of trade—have been the primary drivers of inflationary fluctuations. (Audio: Department of Economic Publications)