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Non-Linear Effects of Monetary Policy and Real Exchange Rate Shocks in Partially Dollarized Economies: An Empirical Study for Peru

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Author Info
Saki Bigio () (New York University and Central Bank of Peru)
Jorge Salas () (Central Bank of Peru)

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Abstract

We study whether monetary policy and real exchange rate shocks have non-linear effects on output and inflation in a partially dollarized economy such as Peru. For this purpose, we use a Smooth Transition Vector Autoregression methodology and then report impulse-response functions for shocks of different sign and size, and conditional to the initial position in the business cycle. We find evidence of non-linearities which imply a convex aggregate supply curve: in particular, monetary policy is more likely to affect the output during recessions than in booms, while the opposite is found for the inflation. Regarding real exchange rate shocks, we show that depreciations have greater negative effects during economic downturns and a higher pass-through rate in the positive side of the business cycle.

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Publisher Info
Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2006-008.

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Date of creation: Aug 2006
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Handle: RePEc:rbp:wpaper:2006-008

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Related research
Keywords: Non-linearities; Monetary Policy; Smooth Transition VAR; Dollarization;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
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  6. Eric Parrado, 2001. "Effects of Foreign and Domestic Monetary Policy in a Small Open Economy: the Case of Chile," Working Papers Central Bank of Chile 108, Central Bank of Chile. [Downloadable!]
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  12. Luis Carranza & Juan M. Cayo & José E. Galdón-Sánchez, 2003. "Exchange Rate Volatility and Economic Performance in Peru: A Firm Level Analysis," Faculty Working Papers 12/03, School of Economics and Business Administration, University of Navarra. [Downloadable!]
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  20. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Addicted to Dollars," NBER Working Papers 10015, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  23. Thoma, Mark A., 1994. "Subsample instability and asymmetries in money-income causality," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 279-306. [Downloadable!] (restricted)
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  1. Luis Carranza & José Enrique Galdón Sánchez & Javier Gómez Biscarri, . "The relationship between investment and large exchange rate depreciations in dollarized economies," Faculty Working Papers 01/08, School of Economics and Business Administration, University of Navarra. [Downloadable!]
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