External Shocks in the Peruvian Economy: A Sign-and-Zero Approach in a BVAR Model

This study quantifies the impact of a set of external shocks on the Peruvian economy, which are categorized as: i) demand, ii) supply, iii) financial, and iv) export prices. Using data from 1995 to 2019, we estimate Bayesian VAR models with an exogenous block, which are identified using zero-and-sign constraints. The results suggest that the Peruvian economy is highly exposed to external shocks, which account for approximately 60% of the variance in domestic variables. Based on an analysis of the variance decomposition of the prediction error, historical decomposition, and impulse-response functions, it is found that external demand shocks are the most significant in explaining the dynamics of domestic GDP, inflation, and the exchange rate. External supply shocks have a greater effect on domestic inflation, while external financial shocks have more significant and lasting effects on the domestic interest rate. Finally, export price shocks have significant effects on exchange rate depreciation.