Monetary policy transmission mechanisms in Peru

The model proposed by Bernanke and Mihov (1998) is extended to the case of a partially dollarized economy to estimate the effects of monetary policy in Peru between 1995 and 2009. The results indicate that monetary policy in Peru, despite the economy being partially dollarized, has effects similar to those predicted by economic theory in non-dollarized economies. In particular, in response to a contractionary monetary policy shock, interest rates rise, monetary aggregates contract, the local currency appreciates, aggregate demand slows, and ultimately inflation falls. However, exchange rate shocks prove to be an important determinant of the money market. Finally, the results show that the Central Bank responds more strongly to money demand shocks than to exchange rate shocks during the period following the adoption of explicit inflation targets. (Audio: Department of Economic Publications)