Exchange rate pressures in Peru: a nonlinear approach

This study examines exchange rate pressures in Peru from 1996 to 2010. A regime-switching model is used to detect and characterize these pressures, classifying them into three states: depreciation, appreciation, and normal movements. Next, the study examines the factors that explain these pressures in the foreign exchange market. It finds that increases in international interest rates reduce the probability of being in a period of appreciation, and that an improvement in the trade balance increases the probability of being in a period of appreciation. Likewise, the depreciation of a strong currency such as the yen against the dollar—a phenomenon associated with an increase in the perception of international risk—increases the probability of entering a period of exchange rate depreciation. Finally, the study finds that fiscal policy was not a determining factor in generating exchange rate pressures. (Audio: Department of Economic Publications)