Bayesian estimation of a small open economy model with partial dollarization

This paper describes a New Keynesian model for a small open economy with partial dollarization, which is similar to the Quarterly Projection Model (MPT) of the Central Reserve Bank of Peru (Vega et al., 2009), and estimates a significant set of its parameters using Bayesian methods. The results show that some of the MPT’s original parameters are empirically validated, while others—such as the weight of the forward-looking components in the aggregate demand and supply equations—should be higher. The results also validate the effectiveness of traditional monetary policy transmission channels, such as the interest rate channel. It is further found that the expectations channel has become more prominent since 2004. (Audio: Department of Economic Publications)