Transmission Channels of Monetary Policy in Peru

This paper presents an extension of the model proposed by Bernanke and Mihov (1998), which includes financial dollarization, in order to estimate the effects of monetary policy in Peru for the period 1995-2009. The results show that the effects of monetary policy in a dollarized economy are similar to the ones observed in non-dollarized economies. In particular, after a restrictive monetary policy shock, interest rates rise, monetary aggregates decrease, exchange rate drops, aggregate demand slows and inflation diminishes. However, exchange rate shocks are important determinants of the money market. Additionally, there is evidence that after the adoption of the inflation targeting regime in 2002 the Central Bank reacts more importantly to money demand shocks than to exchange rate shocks.