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

This paper quantifies the impact of various external shocks on the Peruvian economy, which are characterized as: i) demand, ii) supply, iii) financial, and iv) export price shocks. Using data between 1995 and 2019, we estimate Bayesian VAR models with block exogeneity, which are identified through sign and zero restrictions. Results suggest that the Peruvian economy is highly exposed to external shocks, which explain around 60% of the domestic variables variance. According to forecast error variance decompositions, historical decompositions and impulse-response functions, external demand shocks are the most important drivers of GDP, consumer prices, and exchange rate dynamics. External supply shocks have a greater effect on local inflation, while external financial shocks have a more relevant and persistent effect on the domestic interest rate. Finally, export price shocks have significant effects on exchange rate dynamics.